HUMBOLDT BANCORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-21656

HUMBOLDT BANCORP
(Exact name of registrant as specified in its charter)

CALIFORNIA 93-1175466
(State of Incorporation) (I.R.S. Employer Identification No.)

2440 SIXTH STREET
EUREKA, CALIFORNIA 95502
(Address and Zip Code of Principal Executive Offices)

(707) 445-3233
(Telephone Number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K, and no disclosure will be contained, to the best of the
registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of Form 10-K [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 1, 2002 based on the closing price on that date was
$92,311,000. The number of shares outstanding of Registrant's common stock
outstanding as of March 1, 2002 was 10,346,298.

DOCUMENTS INCORPORATED BY REFERENCE

Information required by Items 10 through 12 of Part III of this Form 10-K
are incorporated by reference to Humboldt Bancorp's proxy statement which will
be filed within 120 days of the end of the fiscal year.
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PART I

This Annual Report on Form 10-K contains certain forward-looking
statements, which are made pursuant to the safe harbor provisions of the Private
Securities Litigation Act of 1995. Statements that expressly or implicitly
predict future results, performance or events are forward-looking. In addition,
the words "expect," "believe," "anticipate" and similar expressions identify
forward-looking statements. Forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those expected. Factors that could cause or contribute to such differences
include, but are not limited to, the following:

- The ability to attract new deposits and loans

- Competitive pricing factors

- Deterioration in economic factors that result in increased loan losses

- Market interest rate fluctuations

- Operational difficulties related to execution of Humboldt's strategic
plan

- Changes in the legal or regulatory requirements

- New technological developments

- The ability to recruit and retain top-level management and staff

Readers are advised not to place undue reliance on any forward-looking
statements contained in this report, which speak only as of the date hereof.
Humboldt Bancorp undertakes no obligation to revise any forward-looking
statements to reflect subsequent events or circumstances.

ITEM 1. BUSINESS

GENERAL

Humboldt Bancorp ("Humboldt") is a California corporation incorporated in
January 1995. Humboldt is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended. As of December 31, 2001, Humboldt had
total assets of $958 million, total net loans of $655 million, total deposits of
$807 million and total shareholders' equity of $67 million. For the year ended
December 31, 2001, Humboldt reported a net loss of $6.0 million, or $0.55 per
diluted share.

Humboldt Bancorp had the following bank subsidiaries as of December 31,
2001:

Humboldt Bank, Tehama Bank, Capitol Valley Bank and Capitol Thrift & Loan
are collectively referred to as the "Banks" in this report. On January 1, 2002,
Capitol Thrift & Loan was merged into Capitol Valley Bank. Humboldt Bank has one
subsidiary, HB Investment Trust, which was formed as a Real Estate Investment
Trust ("REIT") organized under the laws of the State of Maryland on December 31,
2001. Humboldt Bank owns all of the outstanding common stock of HB Investment
Trust and is the sole contributor of real estate assets.

Bancorp Financial Services, Inc. ("BFS") is a subsidiary of Humboldt that
was founded jointly by Humboldt and Tehama Bancorp in 1996. Upon the completion
of the merger with Tehama Bancorp in March 2001, BFS became a wholly-owned
subsidiary of Humboldt. Additional information regarding BFS is contained under
the heading "Bancorp Financial Services -- Discontinued Operations" later in
this Report.

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Humboldt also has three subsidiaries formed for the sole purposed of
issuing Trust Preferred Securities. Further information regarding Trust
Preferred Securities is included in Note 10 to the Financial Statements.

All of Humboldt's subsidiaries are listed in Exhibit 21 of this Report.

RECENT DEVELOPMENTS

On February 6, 2002, Humboldt announced a common stock repurchase program
under which a total of 500,000 shares, or approximately 4.8% of total shares
outstanding, could be repurchased. As of March 15, 2002, approximately 207,000
shares had been repurchased.

On March 8, 2002, Humboldt announced that it had filed for regulatory
approval to merge Capitol Valley Bank and Tehama Bank into Humboldt Bank. After
the merger, Humboldt Bank will operate branches under the trade names of Capitol
Valley Bank and Tehama Bank in the markets currently served by those banks.
Regulatory approval is expected by April 15, 2002 and the charter consolidation
is expected to be completed by June 30, 2002. Humboldt expects to incur
after-tax expenses of $300,000 in connection with the consolidation during the
second quarter of 2002.

MERGERS & ACQUISITIONS

On March 9, 2001, Humboldt acquired, for 3.73 million shares of its common
stock and approximately $300,000 in cash, all of the outstanding common stock of
Tehama Bancorp ("Tehama"), a one-bank holding company, based in Red Bluff,
California. Each share of Tehama common stock was converted into and exchanged
for 1.775 shares of Humboldt common stock. The cash consideration paid was to
Tehama shareholders that exercised their dissenters' rights. This merger was
accounted for as a pooling of interests and, accordingly, all financial
information contained in this Report is has been restated to reflect the
combination of Humboldt and Tehama for all periods presented.

On April 7, 2000, Humboldt acquired Capitol Thrift & Loan for approximately
$11.9 million in cash and a contingent obligation agreement totaling $4.6
million due January 30, 2002. Under the terms of the agreement, the repayment of
principal was contingent upon performance of the Capitol Thrift & Loan loan
portfolio. The contingent liability holders were paid $4.6 million in cash in
full satisfaction of the contingency liability on January 30, 2002. This final
payment resulted in the elimination of negative goodwill in the amount of
approximately $1.2 million and the creation of a goodwill asset in the amount of
$3.4 million.

MARKET AREA AND COMPETITION

The market for banking and bank-related services is highly competitive. The
Banks actively compete in their respective market areas, which are principally
in non-metropolitan areas of Northern California, with other providers of
deposit and credit services. These competitors include other commercial banks,
savings banks, savings and loan associations, credit unions, mortgage companies,
and brokerage firms. The following table displays each of the Banks and the
respective percentage of total deposits in each county where the Bank has
operations. The table also indicates the ranking by deposit size in each of the
local markets. All information in the table was obtained from the Federal
Deposit Insurance Corporation ("FDIC") Summary of Deposits as of June 30, 2001.
Since Capitol Thrift & Loan did not have a material market share in any

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county in which it operates, only the deposits in Placer County are included in
the table below combined with Capitol Valley Bank:

In California generally, major banks and large regional banks dominate the
commercial banking industry. By virtue of their larger capital bases, such
institutions have substantially greater lending limits than those of Humboldt,
as well as more locations, more products and services, greater economies of
scale and greater ability to make investments in technology for the delivery of
financial services.

LENDING AND CREDIT FUNCTIONS

The Banks make both secured and unsecured loans to individuals, firms, and
corporations. Secured loans include first and second real estate mortgage loans.
The Banks also make direct installment loans to consumers on both a secured and
unsecured basis. At December 31, 2001, Consumer, real estate construction, real
estate mortgage, and commercial & industrial loans represented approximately
10%, 10%, 64%, and 16% respectively, of Humboldt's total loan portfolio.
Specific risk elements associated with each of the lending categories include,
but are not limited to:

- Commercial & Industrial -- Industry concentrations; inability to monitor
the condition of collateral (inventory, accounts receivable and
vehicles); lack of borrower management expertise, increased competition;
use of specialized or obsolete equipment as collateral; insufficient cash
flow from operations to service debt payment.

- Real estate -- construction -- Inadequate collateral and long-term
financing agreements

- Real estate mortgage -- Changes in local economy affecting borrower's
employment; insufficient collateral value due to decline in property
value.

- Consumer -- Loss of borrower's employment; changes in local economy; the
inability to monitor collateral (vehicles, boats, and mobile homes)

Inter-agency guidelines adopted by federal bank regulators mandate that
financial institutions establish real estate lending policies with maximum
allowable real estate loan-to-value limits, subject to an allowable amount of
non-conforming loans as a percentage of capital. The Banks adopted the federal
guidelines as their maximum allowable limits; however, policy exceptions are
permitted for real estate loan customers with strong financial credentials.

CREDIT POLICY

The current lending policy of the Banks is to make loans primarily to
persons who reside, work, or own property in their primary market areas.
Unsecured loans are generally made only to persons who maintain depository
relationships with the Banks. Secured loans are made to persons who are well
established and have net worth, collateral, and cash flow to support the loan.
Exceptions to the policy are permitted on a case-by-

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case basis and require the approving officer to document in writing the reason
for the exception. Policy exceptions made for borrowers whose total aggregate
loans exceed the approving officer's credit limit must be submitted to the Chief
Credit Officer or the Bank Board of Directors for approval, depending upon the
size of the loan. The Banks provide each lending officer with written guidelines
for lending activities. Lending authority is delegated by the Boards of
Directors of the Banks to loan officers, each of whom is limited in the amount
of secured and unsecured loans which he or she can make to a single borrower or
related group of borrowers. Loans in excess of individual officer credit
authority must either be approved by a senior officer with sufficient approval
authority or be approved by the Bank Board of Directors.

LOAN REVIEW AND ALLOWANCE FOR LOAN LOSS METHODOLOGY

The Loan Review Department of Humboldt reviews, or engages an independent
third party to review, each of the Banks' loan portfolios on a quarterly basis
to determine any weaknesses in the portfolio and to assess the general quality
of credit underwriting. The results of the reviews are presented to the Chief
Credit Officer of Humboldt, and the Boards of Directors of each of the Banks and
the Audit Committee of Humboldt Bancorp. If an individual loan or credit
relationship has a weakness identified during the review process, the risk
rating of the loan, or all loans comprising a credit relationship, will be
downgraded to a classification that most closely matches the current risk level.
The review process also provides for the upgrade of loans that show improvement
since the last review. Since each loan in a credit relationship may have a
different credit structure, collateral, and other secondary source of repayment,
different loans in a relationship can be assigned different risk ratings.

Under Humboldt's 8-grade loan grading system, which is essentially the same
as the grading system used by banking regulators, grades 1 through 3 are
considered "pass," or very acceptable credit quality that does not require
special monitoring. Grades 4 through 8 are indicative of higher risk loans that
require a greater level of management's attention. The entire 8-grade rating
scale, provides for a higher numeric rating for increased risk. For example, a
risk rating of 1 is the least risky of all credits and would be typical of a
loan that is 100% secured by a deposit at one of the Banks. The five credit
ratings that require special management attention are:

- 4 (Watch) -- Loan is fundamentally sound, but weaknesses exist that could
cause future impairment, such as early indication of adverse trends in
the borrower's financial condition; borrower vulnerability to adverse
economic trends, competitive pressure or technological change; repayment
schedules that have extended principal amortization; or, collateral
values with narrow liquidation margins.

- 5 (Special Mention) -- Fundamentally sound loan that lacks certain
current documentation necessary to verify financial condition of the
borrower, such as current financial statements and tax returns.

- 6 (Substandard) -- Loan that is inadequately protected by borrower net
worth, cash flow capacity or collateral value. Substandard loans
typically have one or more well-defined weaknesses.

- 7 (Doubtful) -- Specific weaknesses characterized by Substandard where
there is no strong secondary source of repayment and collection or
liquidation in full is unlikely. Insufficient information exists to
determine the amount of potential loss.

- 8 (Loss) -- Same characteristics as Doubtful; however, probability of
either partial or full loss is certain and can be reasonably estimated.
Loans classified as such are generally recommended for charge-off
immediately even though there is some potential for future recovery.

Humboldt performs a quarterly analysis to determine the adequacy of the
Allowance for Loan Losses ("ALL") for each of the Banks. The aggregation of the
ALL analyses for the Banks provides the consolidated analysis for Humboldt.

The ALL analysis segregates Humboldt's loan portfolio into 17 different
categories based on type of loan. These categories include commercial
construction, agricultural, government guaranteed, commercial real estate and
consumer loans. First, all loans in each category are assigned a reserve factor
of between 0% and 4.0% based on the inherent risk level of the category and
Humboldt's loss experience. Next, loans graded 6 or

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higher in each category are assigned reserve factors based on the inherent risk
level of the category and Humboldt's loss experience:

All loans graded 4 or 5 are assigned an additional reserve factor of 0.125%
and loans past due 30 days or more are assigned an additional reserve factor of
0.25%. The aggregation of each of the components above provides for the
analytical required reserve for each category. Combining the results of the
analytical required reserve calculation for all 17 loan categories provides the
total required ALL.

Humboldt's ALL methodology provides for the establishment of specific
reserve, based upon the present value of future cash flows discounted at the
loan's effective rate, the loan's observable market price, or the fair value of
collateral if the loan is collateral dependent.

There is no current process used to measure or adjust for differences
between the loss factors for adversely classified loans used in the ALL analysis
and actual losses charged to the ALL. The difference between the actual ALL (as
presented in the consolidated financial statements) and the allocated ALL
represents the unallocated ALL. The unallocated ALL provides for coverage of
credit losses inherent in the loan portfolio but not provided for in the ALL
analysis. The unallocated ALL as of December 31, 2001 was approximately
$500,000.

The ALL represents Humboldt's estimate of the probable losses that have
occurred as of the date of the financial statements, as further described in
Note 1 in the Notes to the Consolidated Financial Statements. Management
believes that the ALL was adequate as of December 31, 2001. There is, however,
no assurance that future loan losses will not exceed the levels provided for in
the ALL which could result in additional charges to the provision for loan
losses. In addition, bank regulatory authorities, as part of their periodic
examination of the Banks, may require additional charges to the provision for
loan losses in future periods if the results of their review warrant.

The Securities and Exchange Commission Staff Accounting Bulletin No. 102
"Selected Loan Loss Allowance Methodology and Documentation Issues" ("SAB No.
102") was released on July 10, 2001. It expresses the staff's views on the
development, documentation, and application of a systematic methodology as
required by Financial Reporting Release No. 28, "Accounting for Loan Losses by
Registrants Engaged in Lending Activities," for determining the ALL in
accordance with general accepted accounting principles. In particular, SAB No.
102 focuses on the documentation the Securities and Exchange Commission staff
would normally expect registrants to prepare and maintain in support of the ALL.
Management believes that Humboldt's process for determining the adequacy of the
ALL is consistently followed and supported by written documentation, policies
and procedures.

MERCHANT BANKCARD SERVICES

In 1993, Humboldt established a merchant credit and debit card processing
operation ("Merchant Bankcard Services"). Since that time, the operation has
grown steadily both in volume and scope of activities. In general, Merchant
Bankcard Services operations involve collecting funds for, and crediting the
accounts of, merchants for sales of merchandise and services to credit and debit
card customers. Merchant Bankcard Services specializes in providing processing
for first time merchants and small-to medium-sized merchants in the retail,
telephone, mail order and Internet commerce industries.

While these merchants vary in size, Humboldt's average typical merchant
generates approximately $50,000 in annual credit card charge volume. Humboldt
believes that there is a market for providing services to these merchants, who
are often overlooked by larger processors. For the year ended December 31, 2001,
no single merchant accounted for more than 0.7% of Merchant Bankcard Services'
total gross processing volume.

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At December 31, 2001, the Merchant Bankcard Department provided processing
services to approximately 99,000 merchants.

INDEPENDENT SERVICE ORGANIZATION PROCESSING

Humboldt markets its Merchant Bankcard services through independent service
organizations ("ISOs"). Since the VISA and Mastercard association rules only
provide membership to financial institutions, ISOs must be affiliated with a
sponsor financial institution in order to be involved in the processing of
credit and debit card transactions. In most cases, ISOs solicit merchant
accounts and perform the customer service and collection function, while
Humboldt provides the accounting and credit underwriting function. For these
functions, Humboldt receives an average processing fee of approximately 0.10%.
Under the terms of the ISO agreements, Humboldt is indemnified against loss by
the ISO.

As of December 31, 2001, Humboldt had six ISO processing agreements
covering a total of approximately 88,000 merchant accounts. The following table
presents the material ISO agreements by contract expiration date (processing
volume in millions):

For the year ended December 31, 2001, Humboldt processed $4.2 billion of
ISO merchant transactions.

Following a modification of the terms of an agreement with a merchant
processing ISO, Humboldt recorded revenue of $3.6 million during 2001. The
agreement, which was negotiated as part of Humboldt's ongoing merchant services
risk management process, provided for payment of this non-recurring fee in
consideration for providing the ISO with the ability to transfer processing of
its merchant accounts to another financial institution.

PROPRIETARY PROCESSING

In 1997, Humboldt began an additional unit within the Merchant Bankcard
Services where all servicing aspects of the relationship with the merchant are
performed by Humboldt, although Humboldt still relies on ISOs for solicitation
of some merchants. Humboldt categorizes these types of accounts as proprietary
accounts ("Proprietary"). For these additional services, Humboldt is able to
retain more income from the service and processing fees paid by the merchants
(approximately 4% of volume processed) than when an ISO is involved. However,
Humboldt assumes all risk of loss associated with Proprietary merchant accounts.

For the year ended December 31, 2001, Proprietary merchant accounts
represented $593 million, or 12%, of total gross processing volume, an increase
of 38% over 2000. There were approximately 10,700 Proprietary merchant accounts
at December 31, 2001. The merchant base is diversified, with no business
category representing more than 12% of total merchant accounts. At December 31,
2001, the largest business categories represented in the Proprietary portfolio
were retail specialty stores, card/gift shops, convenience stores and
restaurants.

Humboldt intends to continue to expand the Proprietary segment of its
business through direct sales efforts, ISO sales and the purchase of merchant
processing portfolios. During 2001, Humboldt paid a total of approximately
$720,000 for various merchant account portfolios. The value paid is classified
as an identifiable intangible and amortized over the expected life of the
acquired portfolio, generally 12 to 36 months.

MERCHANT BANKCARD SERVICES RISKS

There are unique risks associated with processing merchant credit and debit
card transactions. Many of the merchants accept consumers' credit card numbers
over the telephone and Internet. There are no signed

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drafts and the entire process is handled electronically. Since consumers find
these transactions easier to dispute than transactions involving signed drafts,
the charge-back rates for services provided over the telephone and through the
Internet are generally higher. Humboldt views its risk management and fraud
avoidance practices as integral to its operations and overall success because of
potential liability for merchant fraud, charge backs and other losses. While the
first time and small to medium sized merchants may be potentially profitable
accounts, they are by definition high risk because of the lack of business
experience and consequently require close monitoring.

For ISO merchants, risk is mitigated by requiring merchant reserves and by
ISO reserves and guarantees. Reserves are demand deposit or time deposit account
balances with minimum required balances established by withholding a percentage
of processing volume. For the Proprietary account segment, risk management and
fraud control occur initially at the application stage when merchant
applications are reviewed against certain criteria to determine acceptance or
denial. Furthermore, Humboldt addresses these risks by actively monitoring all
merchants on a daily basis, employing an aggressive fraud control monitoring,
requiring personal guarantees for nearly all merchants and holding reserve
deposits for certain merchants.

In the event a consumer is dissatisfied with the merchandise or service, in
general, a merchant must accept a charge-back for a period of 120 days. The
merchant's checking account is debited with the charge-back if sufficient funds
exist; otherwise, the merchant's reserve funds are debited. If a merchant's
reserves are insufficient to fund the charge-back and an ISO is involved,
Humboldt looks to the applicable and available guarantee, if any, of the ISO. If
the merchant's reserve is exhausted and either (i) an ISO is involved but no
guarantee is applicable or available, or (ii) no ISO is involved, Humboldt uses
its internal reserves to fund the charge-back. Humboldt had $76 million of
deposit accounts related to merchant reserves as of December 31, 2001.
Approximately $73 million, or 96%, of the merchant deposits account balances
were in demand deposit accounts.

An allowance for losses is maintained in connection with Humboldt's
merchant bankcard processing activities. An analysis of the adequacy of the
allowance is performed on a quarterly basis. The analysis assigns risk factors
to processing volumes for each ISO and the Proprietary portfolio, based on the
financial strength of the ISO, loss experience, merchant chargeback experience
and other factors.

A summary of the activity in the Merchant Bankcard Services allowance for
losses account for the years ended December 31, 1999, 2000, and 2001 is set
forth in the table below (dollars in thousands):

ASSOCIATION RISKS

Merchant bankcard processing services are highly regulated by credit card
associations such as VISA and Mastercard. In order to participate in the credit
card programs, Humboldt must comply with the credit card association's rules and
regulations, which may change from time to time. In November 1999, VISA adopted
rule changes that required staged-in compliance by March 31, 2001. To become
compliant, Humboldt would have had to reduce its processing volume because its
chargeback percentage was in excess of what the new rules would have allowed. As
a result of these proposed regulations, Humboldt's merchant bankcard income
would have been reduced. In October 2000, VISA adopted a revised set of rules
that are less restrictive than the November 1999 rules and with which Humboldt
is in full compliance. There is no guarantee that the credit card associations
will not, at some future point, adopt more restrictive rules that could
adversely impact Humboldt.

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The association membership rules also provide the right for the association
to levy a charge to all member banks in the event there is a major loss within
the association network. The loss would be allocated to all member banks based
on the percentage of transaction processing performed by each member bank. The
ability to mitigate this risk is beyond Humboldt's control.

ATM FUNDING

In 1996, Humboldt began its automated teller machine ("ATM") funding
operation by sponsoring ISOs that place and service ATMs in various public
places such as restaurants, convenience stores, and gas stations. ATM networks
require each ATM ISO to be sponsored by a chartered financial institution.
Humboldt sponsors these companies and provides cash for their ATMs under a
contractual agreement in exchange for a fee. Tehama Bank, prior to its
acquisition by Humboldt, also was active in ATM Funding and after completion of
the merger continued to provide ATM funding. At December 31, 2001, Humboldt's
ATM Funding operation had a total of $24 million in aggregate funding to 21
different ATM ISOs.

During the fourth quarter of 2001, Humboldt determined that an ATM ISO had
stolen approximately $5.0 million that was provided for funding ATMs.
Subsequently, law enforcement authorities recovered approximately $3.6 million
of the cash. A loss of $1.4 million before tax was recorded in connection with
the theft in 2001.

Humboldt's Audit Committee engaged an independent firm to conduct a process
control review of the ATM Funding operation during December 2001. A report was
issued to the Audit Committee during January 2002, and all recommendations were
immediately implemented. Humboldt is pursuing insurance claims against bond
coverage provided by the ATM ISO and also under the company's financial
institution bond.

In light of the cash theft and related loss, management reevaluated the
financial risks and rewards associated with ATM Funding and determined that
alternative uses of the ATM funding cash, such as funding loans, would provide a
more acceptable risk-adjusted return to Humboldt. Accordingly, a decision was
made during the first quarter of 2002 to begin the process of exiting the ATM
Funding business. By March 31, 2002, Humboldt expects to have its ATM Funding
program reduced to approximately $10 million of cash funded and to substantially
exit the business by June 30, 2002. The decision to terminate the ATM Funding
operation is not expected to have a material impact on Humboldt's results of
operations.

ASSET/LIABILITY MANAGEMENT

Humboldt's Asset/Liability Management Committee ("ALCO") is composed of the
Chief Financial Officer, Treasurer, Chief Credit Officer and Presidents of each
of the Banks. The ALCO meets quarterly and is charged with managing the assets
and liabilities of the Banks. The committees attempt to manage asset growth,
liquidity, and capital to maximize income and manage interest rate risk. The
ALCO directs Humboldt's acquisition and allocation of funds. A more
comprehensive discussion of Humboldt's Asset/ Liability Management and interest
rate risk is contained in the Management's Discussion and Analysis (Part II,
Item 7) section of this report under the heading "Quantitative and Qualitative
Disclosures About Market Risk."

INVESTMENT POLICY

Humboldt's investment policy is to maximize income consistent with
liquidity, asset quality and regulatory constraints. The policy is reviewed from
time to time by the Banks' Boards of Directors. Individual transactions,
portfolio composition, and performance are reviewed and on a regular basis by
the Boards of Directors. Humboldt's Chief Financial Officer administers the
policy and report information to the Boards of Directors of the Banks on a
quarterly basis concerning sales, purchases, maturities and calls, resultant
gains or losses, average maturity, and market appreciation or depreciation by
investment type.

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BANCORP FINANCIAL SERVICES -- DISCONTINUED OPERATIONS

Bancorp Financial Services, Inc. ("BFS") was originally capitalized in 1996
with $2,000,000 contributions from both Humboldt Bancorp and Tehama Bancorp.
Upon the completion of the Tehama Bancorp merger in March 2001, Humboldt became
the sole shareholder of BFS. During the first quarter of 2001, Humboldt's Board
of Directors completed a strategic review of BFS, which principally acquired and
serviced small ticket leases on a nationwide basis. This review was initiated in
response to a number of factors, including the increased regulatory burden
associated with BFS being a wholly owned subsidiary after completion of the
Tehama Bancorp merger, future capital needs of BFS to support its growth and
reliance upon the lease-backed securities market for liquidity. As a result of
this review, Humboldt adopted a plan to discontinue the operations of BFS by
sale of the company and engaged an investment banking firm to facilitate the
sale during the first quarter of 2001. A valuation reserve of $700,000, net of
tax, was recorded during the first quarter of 2001 based on an estimate of the
value of BFS as a going concern.

During the second quarter of 2001 Humboldt was notified by the investment
banker that the prospects for the sale of BFS as a going concern were unlikely.
In response, Humboldt adopted a plan to wind-down the operations of BFS in an
orderly manner. This plan included the immediate termination of all lease and
loan acquisition activities. In connection with the wind-down plan, Humboldt
recognized a loss on discontinued operations, net of tax, of $13.5 million
during the second quarter of 2001.

The operating results of BFS are included, net of tax, in the income
statement as income (loss) from discontinued operations. For the year ended
December 31, 2001, Humboldt reported a loss on discontinued operations of $14.0
million.

Additional information on BFS is contained in Note 3 in the Notes to the
Consolidated Financial Statements.

ECONOMIC CONDITIONS, GOVERNMENT POLICIES AND LEGISLATION

Humboldt's profitability is primarily dependent on interest rate
differentials. In general, the difference between the interest rates paid on
interest-bearing liabilities, such as deposits and other borrowings, and the
interest rates received on interest-earning assets, such as loans and investment
securities, comprise the major portion of Humboldt's earnings. These rates are
highly sensitive to many factors that are beyond the control of Humboldt, such
as inflation, recession and unemployment. The impact which future changes in
domestic and foreign economic conditions might have on Humboldt cannot be
predicted.

The results of operations of the Humboldt are affected by credit policies
of monetary authorities, particularly the Federal Reserve. The instruments of
monetary policy employed by the Federal Reserve to control inflation and combat
economic recession include open market operations in U.S. government securities,
changes in the discount rate on bank borrowings and changes in reserve
requirements against bank deposits. In view of changing conditions in the
national economy and in the money markets, as well as the effect of actions by
monetary and fiscal authorities, including the Federal Reserve, no prediction
can be made as to possible future changes in interest rates, deposit levels,
loan demand, or the business and income of Humboldt. Changes in monetary policy
could have an adverse effect on loan demand, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans,
and Humboldt's condition and results of operations in general and, as a result,
on the market value of the Humboldt's common stock.

In late 2000 and continuing into 2001, the State of California was subject
to a deterioration in the ability of major utilities to provide energy for the
State's needs. These shortages resulted in increased costs and, during the
summer of 2001, "rolling blackouts" during which electric service was
interrupted in some areas for short periods. Although conservation efforts and
increased generation capacity have alleviated electricity shortages, there is no
assurance that future energy shortages will not have a significant adverse
impact on the California economy.

From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance
9

between banks and other financial services providers. Proposals to change the
laws and regulations governing the operations and taxation of banks, bank
holding companies, and other financial institutions and financial services
providers are frequently made in the U.S. Congress, in the state legislatures,
and before various regulatory agencies.

On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, also referred to as Financial Services
Modernization Act. The Financial Services Modernization Act repeals the two
affiliation provisions of the Glass-Steagall Act: Section 20, which restricted
the affiliation of Federal Reserve member banks with firms "engaged principally"
in specified securities activities; and Section 32, which restricts officer,
director or employee interlocks between a member bank and any company or person
"primarily engaged" in specified securities activities. In addition, the
Financial Services Modernization Act also contains provisions that expressly
preempt any state law restricting the establishment of financial affiliations,
primarily related to insurance. The general effect of the law is to establish a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial services providers by revising
and expanding the Bank Holding Company Act of 1956 ("BHCA") framework to permit
a holding company system to engage in a full range of financial activities
through a new entity known as a Financial Holding Company. "Financial
activities" is broadly defined to include not only banking, insurance and
securities activities, but also merchant banking and additional activities that
the Federal Reserve Board, in consultation with the Secretary of the Treasury,
determines to be financial in nature, incidental to such financial activities or
complementary activities that do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally.
Generally, the Financial Services Modernization Act:

- Repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial services providers;

- Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;

- Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries;

- Provides an enhanced framework for protecting the privacy of consumer
information;

- Adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the
Federal Home Loan Bank system;

- Modifies the laws governing the implementation of the Community
Reinvestment Act, sometimes referred to as CRA; and

- Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.

In order for a company to take advantage of the ability to affiliate with
other financial services providers, it must become a "Financial Holding Company"
as permitted under an amendment to the BHCA. To become a Financial Holding
Company, a company would file a declaration with the Federal Reserve Board,
electing to engage in activities permissible for Financial Holding Companies and
certifying that the company is eligible to do so because all of its insured
depository institution subsidiaries are well-capitalized and well-managed. In
addition, the Federal Reserve Board must also determine that each of a holding
company's insured depository institution subsidiaries has at least a
"satisfactory" CRA rating. Humboldt does not have any current plans to apply for
Financial Holding Company status.

Under the Financial Services Modernization Act, federal banking regulators
adopted rules that limit the ability of financial institutions to disclose
non-public information about customers to third parties not affiliated with the
financial institution. Under the privacy rules, which became effective in July
2001, financial institutions must provide notices to customers about their
privacy policy (describing the conditions under which nonpublic personal
information is disclosed), annual notices of their privacy policy to current
customers and a reasonable means for customers to "opt out" of having their
personal information disclosed to third
10

parties. These privacy provisions will affect how consumer information is
transmitted through financial institutions and conveyed to outside vendors.
Management does not believe that compliance with privacy rules will have a
material impact on Humboldt's results of operations.

SUPERVISION AND REGULATION OF HUMBOLDT

Humboldt and the Banks are extensively regulated under both federal and
state laws and regulations. These laws and regulations are primarily intended to
protect depositors, not shareholders. The following information describes
statutory or regulatory provisions affecting Humboldt and the Banks.

The regulations of the Federal Reserve Board, the FDIC, and the California
Department of Financial Institutions govern most aspects of Humboldt's and the
Banks' businesses and operations, including, but not limited to, the scope of
its business, investments, reserves against deposits, the nature and amount of
any collateral for loans, the time of availability of deposited funds, the
issuance of securities, the payment of dividends, bank expansion and bank
activities, including real estate development and insurance activities, and the
making of periodic reports. Various consumer laws and regulations also apply to
the Banks. The Federal Reserve, the FDIC, and the California Department of
Financial Institutions have broad enforcement powers over depository
institutions, including the power to prohibit a bank from engaging in business
practices which are considered to be unsafe or unsound, to impose substantial
fines and other civil and criminal penalties, to terminate deposit insurance,
and to appoint a conservator or receiver under a variety of circumstances. The
Federal Reserve Board also has broad enforcement powers over bank holding
companies, including the power to impose substantial fines and other civil and
criminal penalties.

REGULATION OF BANK HOLDING COMPANIES

Humboldt is a registered bank holding company subject to regulation by the
Board of Governors of the Federal Reserve System (the "Federal Reserve") under
the BHCA. Humboldt is required to file financial information with the Federal
Reserve periodically and is subject to periodic examination by the Federal
Reserve. The BHCA requires every bank holding company to obtain the Federal
Reserve's prior approval before (1) it may acquire direct or indirect ownership
or control of more than 5% of the voting shares of any bank that it does not
already control; (2) it or any of its non-bank subsidiaries may acquire all or
substantially all of the assets of a bank; and (3) it may merge or consolidate
with any other bank holding company. In addition, a bank holding company is
generally prohibited from engaging in, or acquiring, direct or indirect control
of the voting shares of any company engaged in non-banking activities. This
prohibition does not apply to activities listed in the BHCA or found by the
Federal Reserve, by order or regulation, to be closely related to banking or
managing or controlling banks such as data processing, loan servicing, and
brokerage services.

FEDERAL DEPOSIT INSURANCE

The Federal Deposit Insurance Corporation ("FDIC") insures deposits of
federally insured banks, savings banks, savings associations and thrifts and
safeguards the safety and soundness of the banking industry. Two separate
insurance funds are maintained and administered by the FDIC. In general, bank
deposits are insured through the Bank Insurance Fund ("BIF"). Deposits in
savings associations are insured through the Savings Association Insurance Fund
("SAIF"). A SAIF member may merge with a bank as long as the acquiring bank
continues to pay the SAIF insurance assessments on the deposits acquired.
Humboldt Bank pays SAIF insurance assessments on deposits acquired in branch
acquisitions.

The amount of FDIC assessments paid by each member institution is based on
its relative risk of default as measured by regulatory capital ratios and other
factors. The assessment rate currently ranges from $0.00 to $0.27 per $100.00 of
deposits. At December 31, 2001, all of the Banks, except for Capitol Thrift &
Loan, were classified in a manner that the assessment rate was zero. On January
1, 2002, Capitol Thrift & Loan was merged into Capitol Valley Bank and its
deposits are henceforth assessed as part of Capitol Valley Bank.

The FDIC may increase or decrease the assessment rate schedule on a
semi-annual basis in order to manage the BIF and SAIF to prescribed statutory
target levels. During the fourth quarter of 2001 and first quarter of 2002,
published reports indicated that the BIF was likely to fall below the statutory
target of 1.25%
11

of insured deposits during 2002 because of a recent increase in the number of
bank failures and growth in bank deposits. This would require the FDIC to
increase the assessment rate for BIF member banks. Although the amount of any
increase is not currently known, if the BIF remains under the prescribed
statutory target for one year all member banks will be charged $0.23 per $100.00
of deposits. For Humboldt, this would represent an additional pre-tax expense of
approximately $1.9 million annually. An increase in the assessment rate could
have a material adverse effect Humboldt's earnings, depending on the amount of
the increase.

All FDIC-insured depository institutions must pay an annual assessment to
provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under the authority of the Federal
Housing Finance Board. The bonds, commonly referred to as FICO bonds, were
issued to capitalize the Federal Savings and Loan Insurance Corporation. The
FDIC established the FICO assessment rates effective for the fourth quarter of
2001 at approximately $.0184 per $100 annually for assessable deposits. The FICO
assessments are adjusted quarterly to reflect changes in the assessment bases of
the FDIC's insurance funds and do not vary depending on a depository
institution's capitalization or supervisory evaluations.

The FDIC may terminate the deposit insurance of any insured depository
institution if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or pursuant to written agreement with, the
FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing
process for a permanent termination of insurance if the institution has no
tangible capital. The termination of deposit insurance for any or all of the
Banks could have a material adverse effect on Humboldt's results of operations
and liquidity due to the likelihood that substantial deposit withdrawal activity
would occur.

CAPITAL ADEQUACY GUIDELINES

The FDIC has adopted regulations implementing the prompt corrective action
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991,
which place financial institutions in the following five categories based upon
capitalization ratios: (1) a "well capitalized" institution has a total
risk-based capital ratio of at least 10%, a Tier One risk-based ratio of at
least 6% and a leverage ratio of at least 5%; (2) an "adequately capitalized"
institution has a total risk- based capital ratio of at least 8%, a Tier One
risk-based ratio of at least 4% and a leverage ratio of at least 4%; (3) an
"undercapitalized" institution has a total risk-based capital ratio of under 8%,
a Tier One risk-based ratio of under 4% or a leverage ratio of under 4%; (4) a
"significantly undercapitalized" institution has a total risk-based capital
ratio of under 6%, a Tier One risk-based ratio of under 3% or a leverage ratio
of under 3%; and (5) a "critically undercapitalized" institution has a leverage
ratio of 2% or less. Institutions in any of the three undercapitalized
categories would be prohibited from declaring dividends or making capital
distributions. The FDIC regulations also establish procedures for "downgrading"
an institution to a lower capital category based on supervisory factors other
than capital.

Undercapitalized depository institutions are subject to restrictions on
borrowing from the Federal Reserve System. In addition, undercapitalized
depository institutions are subject to growth limitations and are required to
submit capital restoration plans. An insured depository institution's holding
company must guarantee the capital plan, up to an amount equal to the lesser of
5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan, for the plan to be accepted by the applicable
federal regulatory authority. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized and requirements to reduce total assets.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator, generally within 90 days of the date on which they
become critically undercapitalized.

12

In connection with Humboldt's organization of Capitol Valley Bank in March
1999, Humboldt Bank has committed to the FDIC that it will remain "well
capitalized" and that it will maintain minimum Tier I leverage capital ratios of
at least 6.5% for the initial 12 months of operation of Capitol Valley Bank,
6.8% for the next 12 months, and 7.2% for the third 12-month period. In
addition, Humboldt agreed to maintain a Tier I leverage capital ratio for
Capitol Valley Bank of at least 8.0% for its first three years of operation.

Humboldt believes that at December 31, 2001, all of the Banks had
sufficient capital to qualify as "well capitalized" under the regulatory
requirements above and that Humboldt Bank and Capitol Valley Bank had sufficient
capital to comply with the agreements above. Further detail on regulatory
capital ratios is included in Note 20 of the Notes to the Consolidated Financial
Statements.

In January 2001, the Basel Committee on Banking Supervision ("Committee")
proposed its second draft of a new capital adequacy framework. The Committee,
which was established in 1974, meets regularly four times a year. Countries are
represented on the Committee by their central bank. The current regulatory
capital standards described above were first promulgated by the Committee in
1988. The Committee does not possess any formal supranational supervisory
authority, and its conclusions do not, and were never intended to, have legal
force. Rather, it formulates broad supervisory standards and guidelines and
recommends statements of best practice in the expectation that individual
authorities will take steps to implement them through detailed
arrangements -- statutory or otherwise -- which are best suited to their own
national systems.

The new capital framework would consist of minimum capital requirements, a
supervisory review process and the effective use of market discipline. In its
proposal for minimum capital requirements, the Committee set out options from
which banks could choose depending on the complexity of their business and the
quality of their risk management. A standardized approach would refine the
current measurement framework and introduce the use of external credit
assessments to determine a bank's capital charge. Banks with more advanced risk
management capabilities could make use of an internal risk-rating based
approach. Under this approach, some of the key elements of credit risk, such as
the probability of default of the borrower, would be estimated internally by a
bank. The Committee is also proposing an explicit capital charge for operational
risk to provide for problems like internal systems failure. The supervisory
review aspect of the new framework would seek to ensure that a bank's capital
position is consistent with its overall risk profile and strategy. The
supervisory review process would also encourage early supervisory intervention
when a bank's capital position deteriorates. The third aspect of the new
framework, market discipline, would call for detailed disclosure of a bank's
capital adequacy in order to encourage high disclosure standards and to enhance
the role of market participants in encouraging banks to hold adequate capital.
Banks must also disclose how they evaluate their own capital adequacy.

In December 2001, the Committee announced that another version of the new
proposed capital framework would be issued sometime during 2002 after it
completes an assessment of the proposal's impact on the banking system. The new
standards are not expected to become effective prior to 2005. At this time,
Humboldt cannot predict whether the new capital adequacy framework will be
adopted or in what form, or the effect it would have on the financial condition
or results of operations of Humboldt or the Banks.

LIMITS ON DIVIDENDS AND OTHER PAYMENTS

Humboldt has never paid cash dividends, but has declared stock dividends
(Tehama declared and paid dividends in 1999). Humboldt's ability to obtain funds
for the payment of cash dividends, if any, and for other cash requirements is
dependent on the amount of dividends that may be declared by the Banks.
California bank law provides that dividends may be paid from the lesser of
retained earnings or net income of the bank for its last three years. Further, a
California-chartered bank may not declare a dividend without the approval of the
California Department of Financial Institutions if the total of dividends and
distributions declared in a calendar year exceeds the greater of the bank's
retained earnings or net income for its last fiscal year or its current fiscal
year. The Banks' ability to pay dividends may also be limited by capital
adequacy guidelines of the FDIC. Moreover, regulatory authorities are authorized
to prohibit banks and bank holding companies from paying dividends if payment of
dividends would constitute an unsafe and unsound banking practice.

13

The Federal Reserve Board's policy statement governing payment of cash
dividends provides that Humboldt should not pay cash dividends on common stock
unless (i) net income for the past year is sufficient to fully fund the proposed
dividends and (ii) the prospective rate of earnings retention is consistent with
capital needs, asset quality and overall financial condition.

COMMUNITY REINVESTMENT ACT

Under the Community Reinvestment Act of 1977 ("CRA") and implementing
regulations of the banking agencies, a financial institution has a continuing
and affirmative obligation (consistent with safe and sound operation) to meet
the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that the institution
believes are best suited to its particular community. The CRA requires that bank
regulatory agencies conduct regular CRA examinations and provide written
evaluations of institutions' CRA performance. The CRA also requires that an
institution's CRA performance rating be made public.

Although CRA examinations occur on a regular basis, CRA performance
evaluations are used principally in the evaluation of regulatory applications
submitted by an institution. CRA performance evaluations are considered in
evaluating applications for such things as mergers, acquisitions and
applications to open new branches. The following table presents the date of the
last CRA examination and the rating issued for the Banks:

The Financial Services Modernization Act of 1999 amended the CRA by
reducing the frequency of examinations for smaller banks (with assets of less
than $250 million) and by requiring disclosure by community groups as to the
amount of funds received from lenders and the manner those community groups used
those funds. These revisions are not expected to significantly impact the
application of CRA to Humboldt.

STATE REGULATION

As California-chartered institutions, the Banks are subject to regular
examination by the California Department of Financial Institutions. State
regulation affects the operation of the Banks with regard to deposits, mortgage
lending, investments and other activities. State regulation may contain
limitations on an institution's activities that are in addition to limitations
imposed under federal law. State regulation also contains many provisions that
are consistent with federal law.

The California Department of Financial Institutions may initiate
supervisory measures or formal enforcement actions, and if the grounds provided
by law exist, may place a California-chartered financial institution in
conservatorship or receivership. Whenever the Commissioner of Financial
Institutions considers it necessary or appropriate, he may also examine the
affairs of any holding company or any affiliate of a California-chartered
financial institution.

EMPLOYEES

At December 31, 2001, Humboldt employed a total of 486 full-time equivalent
employees. None of Humboldt's employees are represented by a collective
bargaining group, and management considers its relations with its employees to
be good. Information regarding employment contracts for Humboldt's executive
officers is contained in the Proxy Statement for the 2002 Annual Meeting.

14

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Some of Humboldt's directors and executive officers and their immediate
families, as well as the companies in which they may have interests, have had
loans from the Banks in the ordinary course of the Banks' business. In addition,
the Banks expect to have loans with these persons in the future. In management's
opinion, all these loans and commitments to lend were made in the ordinary
course of business, were made in compliance with applicable laws on
substantially the same terms, including interest rates and collateral, as those
prevailing for comparable transactions with other persons of similar
creditworthiness and, in the opinion of management, did not involve more than a
normal risk of collectibility or present other unfavorable features. The
outstanding balance under extensions of credit by the Banks to directors and
executive officers and to the companies that these directors and executive
officers may have an interest was $11,224,000, $8,031,000 and $7,264,000, as of
December 31, 1999, 2000, and 2001 respectively.

ITEM 2. PROPERTIES

The executive offices of Humboldt are located at 2440 Sixth Street, Eureka,
California. Humboldt owns this property, which includes an office building of
approximately 90,000 square feet. As of December 31, 2001, Humboldt owned 13
other properties, 12 of which serve as branch bank offices. All other Humboldt
facilities occupy leased space.

In December 2001, Humboldt sold a property located in Napa, California that
served as a branch location and administrative headquarters of Capitol Thrift &
Loan. Upon completion of the sale, Humboldt entered into an agreement to lease
the property back from the new owner for a term of five months while the process
of relocating the branch is finalized. The administrative functions of Capitol
Thrift & Loan were consolidated into Capitol Valley Bank during the fourth
quarter of 2001.

Note 19 to Humboldt's Consolidated Financial Statements contains additional
information about properties.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of business, various claims and lawsuits are brought
by and against Humboldt. In the opinion of management, there is no pending or
threatened proceeding in which an adverse decision could result in a material
adverse change in the consolidated financial condition or results of operations
of Humboldt.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no submissions of matters to a vote of security holders during
the fourth quarter of the fiscal year covered by this Report.

15

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since March 29, 2000, Humboldt's common stock has been traded on the Nasdaq
National Market System ("Nasdaq") under the symbol "HBEK." Previously,
Humboldt's common stock was quoted on the OTC Bulletin Board. The table below
reflects the high and low closing sales prices for Humboldt's common stock as
reported by Nasdaq and prior to that time, the high and low bid prices as quoted
on the OTC Bulletin Board. As of December 31, 2001 and 2000, there were
50,000,000 shares of Humboldt common stock authorized for issuance. Humboldt
Bancorp common stock has no par value.

No assurances can be given that the high and low prices shown below
reflected the actual market value of Humboldt's common stock. The high and low
prices have been adjusted to reflect the 10% stock dividends issued on February
7, 2000 and June 15, 2001. In addition, the prices indicated reflect
inter-dealer prices, without retail mark-up, mark down or commission and may not
represent actual transactions.

As of December 31, 2001 there were approximately 1,576 shareholders, not
including those held in street name by brokerage firms. As of December 31, 2001,
a total of 1,538,360 shares of Humboldt common stock underlie outstanding
options and warrants.

Humboldt has never declared a cash dividend on the common stock. Payment of
future dividends is at the discretion of the board of directors and subject to a
number of factors, including results of operations, general business conditions,
capital requirements, general financial condition, and other factors deemed
relevant by the board of directors. Further, our ability to issue cash dividends
is subject to meeting certain regulatory requirements. See "Supervision and
Regulation of Humboldt Bancorp."

16

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)

- ---------------

(1) All financial results have been restated to reflect the merger with Tehama
Bancorp, which was accounted for as a pooling of interests. Financial
results also include the acquisition of Capitol Thrift and Loan effective
April 7, 2000.

(2) Excludes the impact of discontinued operations and merger-related expenses.

nm -- not meaningful
Refer to Humboldt Bancorp Report on Form 10-K for a complete set of Consolidated
Financial Statements.
17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations appears on pages A-1 through A-23 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information regarding Quantitative and Qualitative Disclosures about Market
Risk appears on page A-18 through A-23 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Quantitative and Qualitative Disclosure about Market Risk" and is
incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information regarding Financial Statements and Supplementary Data appears
A-24 through A-62 under the captions "Consolidated Balance Sheets",
"Consolidated Statements of Operations", Consolidated Statements of Changes in
Stockholders' Equity", "Consolidated Statements of Cash Flows" and "Notes to
Consolidated Financial Statements" and is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Richardson & Co. was previously the principal accountant for Humboldt.
Effective September 4, 2001. Richardson &Co.'s appointments as principal
accountant was terminated and KPMG LLP was engaged as principal accountants. The
decision to change accountants was approved by the audit committee and the full
board of directors of Humboldt.

During Humboldt's two most recent fiscal years ended December 31, 2000 and
2999, and the subsequent interim period preceding the dismissal through
September 4, 2001, there were no disagreements with Richardson & Co. on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to Richardson
& Co.'s satisfaction would have caused it to make a reference to the subject
matter of the disagreements in connection with its reports.

None of the "reportable events" described under Item 304(a)(1)(v) of
Regulation S-K occurred within Humboldt's two most recent fiscal years and the
subsequent interim period through September 4, 2001.

The audit report of Richardson & Co. on the consolidated financial
statements of Humboldt and subsidiaries as of and for the fiscal years ended
December 31, 2000 and 1999, did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainly, audit scope, or
accounting principles.

During Humboldt's two most recent fiscal years ended December 31, 2000 and
1999, and the subsequent interim period through September 4, 2001, Humboldt did
not consult with KPMG LLP regarding any of the matter or events set forth in
Item 304(a)(2)(i) and (ii) or Regulation S-K.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Humboldt intends to file a definitive proxy statement for the 2001 Annual
Meeting of Shareholders (the "Proxy Statement") with the Securities and Exchange
Commission within 120 days of December 31, 2001. Information regarding directors
of Humboldt Bancorp will appear under the caption "Election of Directors" in the
Proxy Statement and is incorporated herein by reference. Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, and executive officers will appear under the captions "Executive
Compensation" -- Section 16(a) Principal Shareholders and Share Ownership of
Management and Directors in the Proxy Statement and is incorporated herein by
reference.

18

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation will appear under the captions
"Compensation of Directors", "Executive Compensation" in the Proxy Statement and
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management will appear under the caption "Principal Shareholders and Share
Ownership of Management and Directors" in the Proxy Statement and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions will
appear under the caption "Certain Transactions" in the Proxy Statement and is
incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

The following documents are filed as part of this report:

Report of Independent Auditors.............................. A-24
Consolidated Balance Sheets at December 31, 2000 and 2001... A-27
Consolidated Statements of Operations for the years ended
December 31, 1999, 2000, and 2001......................... A-28
Consolidated Statements of Changes in Stockholders' Equity
for years ended December 31, 1999, 2000, and 2001......... A-29
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000, and 2001......................... A-30
Notes to Consolidated Financial Statements.................. A-31

2. Financial Statement Schedules

All financial statement schedules are omitted, as the required information
is not applicable or included in the notes to the financial statements.

3. Exhibits See Item 14(c) below.

(b) No reports on Form 8-K were filed by Humboldt during the quarter ended
December 31, 2001.

(c) Exhibits Required by Item 601 of Regulation S-K

23.1 Consent of KPMG LLP
23.2 Consent of Richardson and Company
23.3 Consent of Perry-Smith LLP

- ---------------

(1) Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended December 31, 1996, and previously filed with the Commission.

(2) Incorporated by reference to the Company's Definitive Proxy Statement for
the Company's 1996 Annual Meeting previously filed with the Commission (and,
with respect to the Stock Option Plan, as amended pursuant to the terms set
forth in the Definitive Proxy Statement for the Company's 1998 Annual
Meeting).

(3) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1998, and previously filed with the Commission.

(4) Previously filed on November 12, 1999, with the Company's filing on Form S-4
(File No. 333-90925).

(5) Previously filed on February 7, 2000, with the Company's pre-effective
amendment no. 1 to Form S-4 (File No. 333-90925).

(6) Filed on November 14, 2000, with the Company's Form 10-Q for the quarter
ended September 30, 2000.

(7) Previously filed on November 14, 2000, with the Company's filing on Form S-4
(File No. 333-49866).

(8) Previously filed on January 14, 2001, with the Company's filing on
pre-effective amendment no. 1 to Form S-4 (File No. 333-49866).

(d) Additional Financial Statements

Not applicable.

20

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchanged Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 25th day of
March, 2002.

HUMBOLDT BANCORP

BY: /s/ THEODORE S. MASON
------------------------------------
THEODORE S. MASON

PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

At December 31, 2001, Humboldt had total consolidated assets of $958
million, total net loans of $655 million, total deposits of $807 million and
stockholders' equity of $67 million. For the year ended December 31, 2001,
Humboldt reported a net loss of $6.0 million, or $0.55 per diluted share, and
net income from continuing operations of $8.0 million, or $0.74 per diluted
share. The loss on discontinued operations resulted from the wind-down of
Humboldt's leasing subsidiary, discussed in detail below under the heading
"Discontinued Operations."

All outstanding and weighted average share amounts presented in this report
have been restated to reflect the 10% stock dividends in 1997, 1998, 2000 and
2001, and a five-for-two stock split in 1999.

SIGNIFICANT TRANSACTIONS DURING 2001

On March 9, 2001, Humboldt acquired, for 3.73 million shares of its common
stock and $220,000 in cash, all of the outstanding common stock of Tehama
Bancorp ("Tehama"), a one-bank holding company, based in Red Bluff, California.
Each share of Tehama common stock was converted into and exchanged for 1.775
shares of Humboldt common stock. The cash consideration paid was to Tehama
shareholders that exercised their dissenters' rights. This merger was accounted
for as a pooling of interests and, accordingly, all financial information
contained in this Report is has been restated to reflect the combination of
Humboldt and Tehama for all periods presented.

During 2001, Humboldt formed two wholly owned statutory trusts, which
issued a total of $15 million of guaranteed preferred beneficial interests in
Humboldt's junior subordinated deferrable interest debentures ("Trust Preferred
Securities") to institutional investors. The Trust Preferred Securities qualify
as Tier 1 capital under Federal Reserve Board guidelines. All of the common
securities of the trusts are owned by Humboldt. The proceeds from the issuance
of the securities and the Trust Preferred Securities were used by the trusts to
purchase $15.5 million of junior subordinated debentures of Humboldt. The
proceeds received by Humboldt from the sale of the junior subordinated
debentures were used to repay line of credit borrowings of approximately $5.0
million, to repay principal and interest on the promissory notes issued in
connection with the acquisition of Capitol Thrift & Loan, to provide liquidity
for Bancorp Financial Services and for other corporate purposes. The debentures
represent the sole asset of the trusts. The debentures and related income
statement effects are eliminated in Humboldt's financial statements. Refer to
Note 10 of the Notes to the Consolidated Financial Statements for additional
information regarding the terms and structure of these Trust Preferred
Securities.

SIGNIFICANT TRANSACTIONS DURING 2000

On April 7, 2000, Humboldt acquired Capitol Thrift & Loan for approximately
$11.9 million in cash and a contingent obligation agreement totaling $4.6
million due January 30, 2002. Under the terms of the agreement, the repayment of
principal was contingent upon performance of the Capitol Thrift & Loan loan
portfolio. The contingent liability holders were paid $4.6 million in cash in
full satisfaction of the contingency liability on January 30, 2002. This final
payment resulted in the elimination of negative goodwill in the amount of
approximately $1.2 million and the creation of a goodwill asset in the amount of
$3.4 million.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

HUMBOLDT IS DEPENDENT ON NON-TRADITIONAL BANKING INCOME FOR GROWTH

Because of limited growth in the Humboldt-Eureka area, a substantial
portion of Humboldt's revenue is derived from non-traditional activities,
especially merchant bankcard processing. Non-interest income comprised 32.2%,
27.7% and 31.0% of total revenues for the years ended December 31, 1999, 2000
and 2001, respectively. Humboldt's Merchant Bankcard Services operation focuses
on first-time merchants and smaller

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merchants in the retail, telecommunications, mail order and Internet commerce
industries. Because these merchants do not have an established business record
and are located throughout the United States, they are a greater business risk
and they require more effort to monitor in the event the merchant experiences a
problem. A reduction in revenues from merchant bankcard processing would have an
adverse effect on Humboldt's net income.

DETERIORATION OF LOCAL ECONOMIC CONDITIONS COULD HURT OUR PROFITABILITY

Humboldt's banking operations are located in California, and, in
particular, Northern California. As a result of this geographic concentration,
financial results depend largely upon economic conditions in these areas.
Adverse local economic conditions in California, and, in particular, Northern
California, may have a greater adverse effect on our financial condition and
results of operations than if we were a larger, more geographically diverse bank
holding company.

PLANS TO CONSOLIDATE BANK CHARTERS MAY STRAIN OUR PERSONNEL AND SYSTEMS

Humboldt has grown substantially through mergers, branch acquisition
activity, new bank and branch openings, the introduction of new product lines,
and sustained increases in loans and deposits. Rapid growth has at times put
high demands on management and personnel, and has required increased
expenditures for new employees, enhanced training, office space, and technology
upgrades. The announced plans to consolidate Capitol Valley Bank and Tehama Bank
into Humboldt Bank will require an extensive computer conversion process that
will enhance reporting capabilities and improve overall efficiency.

THE BANKS FACE STRONG COMPETITION

In recent years, competition for bank customers, the source of deposits and
loans, has greatly intensified. This competition includes:

- large national and super-regional banks, which have well-established
branches and significant market share in many of the communities we
serve;

- finance companies, investment banking and brokerage firms, and insurance
companies that offer bank-like products;

- credit unions, which can offer highly competitive rates on loans and
deposits because they receive tax advantages not available to commercial
banks;

- government-assisted farm credit programs that offer competitive
agricultural loans;

- other community banks, including start-up banks, which can compete with
us for customers who desire a high degree of personal service;

- technology-oriented financial institutions including large national and
super-regional banks offering on-line deposit, bill payment, and mortgage
loan application services; and

- other companies offering merchant bankcard processing services.

Other existing single or multi-branch community banks, or new community
bank start-ups, have marketing strategies similar to Humboldt's. These other
community banks can open new branches in the communities we serve and compete
directly for customers who want the high level of service community banks offer.
Other community banks also compete for the same management personnel and the
same potential acquisition and merger candidates in Northern California.

Historically, insurance companies, brokerage firms, credit unions and other
non-bank competitors have less regulation than banks and can be more flexible in
the products and services they offer. Under the Financial Services Modernization
Act of 1999, most separations between banks, brokerage firms and insurance
companies were eliminated, which has increased competition.

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TRANSITION TO A NEW PRESIDENT AND CHIEF EXECUTIVE OFFICER

On March 25, 2002, Humboldt announced the appointment of Robert M.
Daugherty to succeed Theodore S. Mason as President and Chief Executive Officer
effective April 15, 2002. As with any leadership transition, there is risk that
the transition will not go as planned for a wide variety of reasons. This could
possibly be disruptive to Humboldt as an organization and adversely impact
Humboldt's results of operations.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in future periods. Humboldt's significant accounting policies are
described in Note 1 in the Notes to the Consolidated Financial Statements. Not
all of these critical accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, management believes that
the following policies could be considered critical within the SEC definition.

RESERVES AND CONTINGENCIES

Humboldt must manage and control certain inherent risks in the normal
course of its business. These include, credit risk, fraud risk, operations and
settlement risk, and interest rate risk. Humboldt has established reserves for
risk of losses, including loan losses, tax contingencies, merchant bankcard
losses and losses related to discontinued operations. The allowance for loan
losses represents Humboldt's estimate of the probable losses that have occurred
as of the date of the financial statements, as further described in Note 1 in
the Notes to the Consolidated Financial Statements. Management believes that
Humboldt has appropriately accrued for tax exposures. The allowance for merchant
bankcard losses represents Humboldt's estimate of probable losses that have
occurred as of the date of the financial statements. Reserves related to the
wind-down of discontinued operations represent management's estimate of losses
that will be incurred upon the disposition of assets and the costs associated
with operations during the wind-down period.

If Humboldt prevails in a matter for which an accrual has been established
or is required to pay an amount exceeding recorded reserves, the financial
impact will be reflected in the period in which the matter is resolved.

DERIVATIVE FINANCIAL INSTRUMENTS

Humboldt has a policy that provides for the use of derivative financial
instruments to hedge interest rate risk. This policy permits the use of interest
rate swaps, cap and floor contracts to hedge specific interest rate risk
exposures as part of Humboldt's asset/liability management process. This policy
limits the notional amount of total derivative financial instruments to 15% of
total assets. Note 1 in the Notes to Consolidated Financial Statements contains
additional information on accounting policies related to derivative financial
instruments.

DISCONTINUED OPERATIONS/OFF-BALANCE SHEET FINANCING

During the first quarter of 2001, Humboldt classified its leasing
subsidiary, Bancorp Financial Services, Inc. ("BFS") as a discontinued operation
upon adoption of a plan to sell the subsidiary. During the second quarter of
2001, it was determined that a sale of BFS was unlikely and the plan was
modified to wind-down the operations of BFS. Management believes that the
wind-down of BFS meets the requirements for classification as a discontinued
operation. Note 3 in the Notes to the Consolidated Financial Statements contains
additional information about Discontinued Operations.

Prior to its classification as a discontinued operation, BFS formed three
subsidiaries that were not consolidated on the financial statements of BFS or
Humboldt. These subsidiaries are commonly referred to as special purpose
entities, or SPEs. As of December 31, 2001, only two subsidiaries were not
consolidated. Both

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of the remaining unconsolidated subsidiaries are considered "qualifying" SPEs
that were formed for the sole purpose of issuing lease-backed notes to
institutional investors. Additional information on these SPEs in provided in
Note 3 in the Notes to the Consolidated Financial Statements.

REVENUE RECOGNITION

Humboldt's primary sources of revenue are interest income and fees received
in connection with providing merchant bankcard processing services. Interest
income is recorded on an accrual basis. Note 1 in the Notes to the Consolidated
Financial Statements contains an explanation of the process for determining when
the accrual of interest income is discontinued on impaired loans and under what
circumstances loans are returned to an accruing status. Merchant bankcard
revenue is recorded on a cash basis.

An additional source of revenue for Humboldt is related to the gains
recorded in connection with the sale of loans for which Humboldt retains the
right to service the loans. Recording of such gains involves the use of
estimates and assumptions related to the expected life of the loans and future
cash flows. Note 1 in the Notes to the Consolidated Financial Statements
contains additional information regarding Humboldt's accounting policy for
revenue recorded in connection with the sale of loans. Mortgage servicing rights
resulting from the sale of loans are based upon estimates and are subject to the
risk of prepayments.

BUSINESS SEGMENTS

SFAS No. 131 requires disclosure of key financial information as measured
by management in assessing performance of Humboldt's key business segments,
Commercial Banking and Merchant Bankcard Services. The disclosures related to
the results for these lines of business is included in Note 23 of the Notes to
the Consolidated Financial Statements.

RESULTS OF CONTINUING OPERATIONS

For the year ended December 31, 2001, net income from continuing operations
was $8.0 million, a decrease of 16.5% as compared with $9.6 million for the same
period in 2000. Diluted earnings per share were $0.74 and $0.90 for the years
ended December 31, 2001, and 2000, respectively.

For the year ended December 31, 2001, Humboldt recognized expenses related
to the Tehama merger of $2.8 million, net of tax. Excluding the impact of merger
related charges, net income from continuing operations for the year ended
December 31, 2001 was $10.8 million, or $1.00 per diluted share, an increase of
11% over the same period in 2000. These operating results, excluding
merger-related expenses, produced a return on average shareholders' equity and
return on average assets for the year ended December 31, 2001 of 15.45% and
1.18%, respectively, compared with 15.13% and 1.25%, respectively, for the same
period in 2000.

The increase in operating earnings during 2001 (excluding $3.5 million in
merger related expense) compared to 2000, was the result of significant growth
in interest earning assets, primarily in loans and merchant bankcard revenue.
For 2001, net interest income increased 9% as compared to 2000. This increase
was primarily due to a 19% increase in average earning assets. The increase in
merchant bankcard services contributed to a 32% increase in non-interest income.
Increases in operating expenses were required to service and support Humboldt's
growth. As a result, increases in revenue were offset for 2001 by a 21% increase
in recurring operating expenses, as compared to 2000.

For the year ended December 31, 2000, net income was $9.6 million, an
increase of 60.0% over net income of $6.0 million earned during the same period
in 1999. Diluted earnings per share were $0.90 and $0.61 for the years ended
December 31, 2000, and 1999, respectively. The return on average assets for the
years ended December 31, 2000 and 1999 was 1.25% and 1.05% respectively. The
return on average equity for the years ended December 31, 2000 and 1999 was
15.13% and 12.30% respectively.

The increase in earnings for the year ended December 31, 2000, versus the
prior period in 1999 can be attributed primarily to the acquisition of Capitol
Thrift & Loan and growth of Humboldt's merchant bankcard division.

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NET INTEREST INCOME

Net interest income increased 9% to $38 million in 2001 from $35 million in
2000. This increase was due to the $129 million, or 19%, increase in
average-earning assets, primarily due to loan growth. Net interest income
increased 34% in 2000, from $26 million in 1999. This increase was primarily due
to the acquisition of Capitol Thrift & Loan.

Table 1 presents, for the years indicated, condensed average balance sheet
information for Humboldt, together with interest income and yields earned on
average interest-earning assets and interest expense and rates paid on average
interest-bearing liabilities.

TABLE 1 -- AVERAGE RATES AND BALANCES

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(1) Tax-exempt income has not been adjusted to its tax-equivalent basis. Net
interest margin on a fully taxable basis, for 1999, 2000, and 2001 was
5.36%, 5.26%, and 4.79, respectively.

(2) Nonaccrual loans are included in the average balance.

(3) Net interest margin is computed by dividing net interest income by total
average earning assets.

The most significant impact on Humboldt net interest income between periods
is derived from the interaction of changes in the volume of and rate earned or
paid on interest-earning assets and interest-bearing liabilities. The volume of
interest-earning asset dollars in loans and investments, compared to the volume
of interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in the net interest income between
periods. Table 2 sets forth, for the years indicated, a summary of the changes
in net interest income due to changes in average asset and liability balances
(volume) and changes in average interest rates (rate). Changes in interest
income and expense which are not attributable specifically to either volume or
rate are allocated proportionately between both variances.

TABLE 2 -- RATE/VOLUME ANALYSIS

Interest income in 2001 increased 11% to $66 million from $60 million in
2000. This was primarily due to the significant increase in loans, Humboldt's
highest yielding earning asset. The increase was offset by a decrease in the
yield earned on average earning assets. Average earning assets increased $129
million, or 29%, to $802 million in 2001, compared to $673 million in 2000.
Average loans increased $112 million, or 22%, to $616 million in 2001 from $504
million in 2000. Average investment securities and Federal funds sold, increased
10% to $185 million in 2001 from $169 million in 2000.

The average yield on earning assets decreased 60 basis points to 8.26% in
2001 from 8.85% in 2000 primarily due to a decrease in the prime lending rate.
The prime lending rate dropped to 4.75% in 2001 from its peak in 2000 of 9.50%.
Loans represented approximately 79% of total earning assets in 2001 compared to
81% in 2000. The average yield on loans decreased 56 basis points to 9.08% from
9.64% in 2000.

Interest expense in 2001 increased 14% to $29 million from $25 million in
2000. Average interest-bearing liabilities increased 23% to $643 million in 2001
from $524 million in 2000. Interest rates decreased 28%, primarily as a result
of decreases in market interest rates. During 2001, average non-interest bearing
deposits increased 7%, to $185 million, from $172 million in 2000.

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Humboldt's interest rate spread decreased to 3.81% in 2001 from 4.10% in
2000, and the net interest margin decreased to 4.69% from 5.15%. Interest income
increased 51.6% to $60 million in 2000 from $39 million in 1999, as a result of
the increase in average earning assets enhanced by an increase in the yields
earned. The acquisition of Capitol Thrift & Loan in April 2000 contributed
approximately $12 million in average earning assets for 2000. Average earning
assets increased 36% to $673 million in 2000 from $496 million in 1999 primarily
as a result in the increase in loans. The yield on average interest-earning
assets increased 93 basis points to 8.85% in 2000 from 7.92% in 1999 primarily
as a result of increasing rate environment. Interest expense in 2000 increased
85% to $25 million from $14 million in 1999, primarily as a result of the
increase in the volume of interest-bearing liabilities and by an increase in the
rates paid on interest-bearing liabilities. The acquisition of Capitol Thrift &
Loan provided for an increase of $11 million in interest-bearing liabilities in
2000. Corresponding to the growth in average earning assets, average interest-
bearing liabilities increased 46% to $524 million in 2000 from $358 million in
1999.

Humboldt's interest rate spread declined to 4.10% in 2000 from 4.16% in
1999, and the net interest margin declined to 5.15% in 2000 from 5.21% in 1999.

PROVISION FOR LOAN LOSSES

The provision for loan losses was $2.9 million in 2001, compared with $2.5
million in 2000, and $2.3 million in 1999. As a percentage of average
outstanding loans, the provisions recorded for 2001, 2000, and 1999 were .47%,
.50%, and .72%, respectively. Net loan charge-offs as a percentage of average
outstanding loans for 2001 were .24%, compared with .33% for 2000 and .60% for
1999. The increase in the provision for loan loss in 2001 is primarily
attributed to growth in the loan portfolio. The provision for loan losses is
based on management's evaluation of inherent risks in the loan portfolio and the
corresponding analysis of the allowance for loan losses. Additional discussion
on loan quality and the allowance for loan losses is included in the Asset
Quality section of this report.

NON-INTEREST INCOME

Non-interest income is a significant source of revenue for Humboldt,
representing 32.2%, 27.7%, and 31.0% of total revenue for the years ended
December 31, 1999, 2000, and 2001, respectively. Total non-interest income for
1999 was $18.7, compared with $22.9 million in 2000 and $29.7 million in 2001.
Table 3 presents the components of non-interest income for 1999, 2000 and 2001.

TABLE 3 -- NON-INTEREST INCOME

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Merchant bankcard revenue is Humboldt's largest source of non-interest
income. During the first quarter of 2001, Humboldt changed the methodology for
accounting for certain interchange or pass-through fees that are paid to third
parties in connection with merchant processing. This adjustment provided for a
decrease in non-interest income and an offsetting decrease in non-interest
expense, representing the portion of fees received from merchants that was
passed through to third parties, such as ISOs. In order to provide for a
comparable presentation of 2001 results with prior periods, merchant bankcard
processing fee revenue for 2000 and 1999 was adjusted for pass-through fees.

Merchant bankcard revenue increased 34% to $16.5 million and 17% to $12.3
million for 2001 and 2000 respectively. The reason for the increase is primarily
related to an increase in the number of merchants obtained directly from
Humboldt's proprietary marketing efforts. Following a modification of the terms
of an agreement with a merchant processing ISO, Humboldt recorded revenue of
$3.6 million during 2001. The agreement, which was negotiated as part of
Humboldt's ongoing merchant services risk management process, provided for
payment of this non-recurring fee in consideration for providing the ISO with
the ability to transfer processing of its merchant accounts to another financial
institution.

Included in service charges are fees related to Humboldt's ATM funding
operation. Total ATM funding revenue was $2.9 million, $3.1 million and $1.9
million for 2001, 2000 and 1999 respectively. The increase of $1.2 million
dollars in 2000 was due to the increase in ATM operators during the period.
During the first quarter of 2002, Humboldt conducted an evaluation of the
risk-return relationship of ATM funding in light of a $1.0 million after-tax
loss recorded during the fourth quarter 2001 in connection with the theft of
cash by an ATM operator. Management has decided that alternative uses of the ATM
funding cash, such as funding loans, would provide a more acceptable
risk-adjusted return to Humboldt.

A significant source of non-interest income for Humboldt is service charges
and fees on deposit accounts. Total deposit service charges and fees for 2001
were $5.2 million compared with $5.2 million in 2000 and $3.2 million in 1999.

Net gains on the sale of loans, which principally include residential real
estate and SBA loans, totaled $877,000, $691,000, and $1.3 million for years
ended December 31, 1999, 2000, and 2001, respectively. Loans sold totaled $63
million and $130 million for December 31, 2000 and 2001, respectively. The
estimated fair value of the servicing assets aggregated $2,001,000 and
$2,200,000 at December 31, 2000 and 2001, respectively. A valuation allowance is
recorded where the fair value is below the carrying amount of the servicing
assets. No valuation allowance was needed at December 31, 2000 and 2001. The
increase for year-end 2001 is attributed to substantial increases in the volume
of residential real estate loan originations as a result of growth in SBA loan
production resulting from increase marketing and sales efforts.

NON-INTEREST EXPENSE

Total non-interest expense for 2001 was $52 million, compared with $41
million in 2000 and $33 million in 1999. Table 4 presents the components of
non-interest expense for the years ended December 31, 2001, 2000 and 1999.

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TABLE 4 -- NON-INTEREST EXPENSE

The increase in operating expenses in 2001 and 2000 are primarily due to
salaries and employee benefits and merger related expenses.

Salaries and employee benefits increased in 2001 to $24.0 million, compared
to $20.8 million in 2000 and $16.2 million in 1999. The increase in salaries and
employee benefits in 2001 and 2000 is due primarily to employee group insurance
expense, and to the acquisition of Capitol Thrift and Loan in 2000 respectively.
The remaining increase is consistent with growth.

Employee group insurance expense increased 62.5% to $2.6 million in 2001,
compared to $1.6 million in 2000. The primary reasons for the increase were
several maximum medical claims on the company's self insured policy and premium
increases.

The ratio of operating expenses to average assets was 5.33% in 2001
(excluding merger related), 5.33% in 2000, and 5.85% in 1999.

During the first quarter of 2001, Humboldt incurred $3.5 million of
expenses in connection with the completion and integration of the merger with
Tehama Bancorp. Table 5 sets forth the major components of the merger-related
charge.

TABLE 5 -- MERGER-RELATED ITEMS

During the fourth quarter of 2001, Humboldt announced plans to merge
Capitol Thrift & Loan into Capitol Valley Bank. This merger was completed
effective January 1, 2002, and management expects to realize a non-interest
expense reduction of $450,000 annually, primarily in compensation expense, as a
result of the consolidation.

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INCOME TAXES

Humboldt's effective income tax rate as a percentage of pre-tax income for
2001 was 35.2%, compared to 33.0% in 2000 and 34.1% in 1999. The effective tax
rates were below the expected statutory federal rate of 34.0% and the state
franchise tax rate of 7.1% (net of the federal benefit), principally, because of
exemptions for Enterprise Zone loans for state tax purposes, exemptions for
municipal obligations for federal purposes, exemptions for municipal obligations
for federal purposes, low income housing tax credits, bank owned life insurance
and other permanent differences.

BALANCE SHEET OVERVIEW

Total assets increased 12.3% to $957.7 million at December 31, 2001,
compared to $852.3 million at December 31, 2000. Total assets increased 34% in
2000 from $635 million at December 31, 1999. The asset growth during in 2001 was
primarily due to internal loan growth. The asset increase during 2000 was
primarily attributed to the acquisition of Capitol Thrift & Loan and internal
loan growth.

INVESTMENT SECURITIES

Humboldt invests excess funds in a variety of instruments in order to meet
liquidity and profitability goals. A portion of available funds is invested in
liquid investments including overnight federal funds. The balance is invested in
investment securities including U.S. Treasury and Agency securities such as
collateralized mortgage obligations ("CMOs"), tax-exempt municipal bonds,
corporate bonds, and Federal Home Loan Bank and Federal National Mortgage
Corporation stock.

At December 31, 2001, the fair value of Humboldt's investment securities
totaled $172.5 million, an increase of $33.0 million, or 23.7%, compared with
December 31, 2000. Table 6 provides information as to the composition of
Humboldt's investment portfolio.

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TABLE 6 -- INVESTMENT SECURITIES COMPOSITION

LOANS

Total gross loans increased 13.9% to $666.8 million at December 31, 2001,
compared to $585.0 million at December 31, 2000. Total gross loans increased
51.6% in 2000 from $374.6 million at year-end 1999. The increases in loan volume
in 2000 was primarily due to the acquisition of Capitol Thrift & Loan.

Humboldt's loan portfolio consists of commercial real estate, residential
real estate, commercial & industrial and consumer loans and leases. While no
specific industry concentration is considered significant, Humboldt's lending
operations are dependent on the local economy. Accordingly, a downturn in the
regional economy could adversely impact Humboldt's borrowers. This could, in
turn, reduce the demand for loans and adversely impact the borrowers' abilities
to repay their loans.

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Table 7 presents the composition of Humboldt loan portfolio at the dates
indicated.

TABLE 7 -- LOAN PORTFOLIO COMPOSITION

Humboldt's real estate loans are secured primarily by property in
Humboldt's primary market areas. At December 31, 2001, the major components of
the commercial real estate portfolio were owner-occupied office/retail (54%),
non-owner occupied office/retail (29%) and lodging (8%).

As of December 31, 2001, Humboldt's 20 largest credit relationships
consisted of loans and loan commitments ranging from $2.5 million to $12.3
million, with an aggregate total credit exposure of $82 million. All of these
credits have been underwritten in a prudent manner and structured to minimize
Humboldt's potential exposure to loss.

Table 8 presents the maturity distribution of Humboldt's real estate
commercial, real estate construction, residential real estate, and commercial
portfolios and the sensitivity of such loans to changes in interest rates at
December 31, 2001.

TABLE 8 -- MATURITY OF CONSTRUCTION/COMMERCIAL RE LOANS

LOAN SERVICING

Humboldt sells the majority of the residential mortgage loans and some of
the Small Business Administration ("SBA") loans it originates to institutional
investors. However, it retains the servicing on these loans in order to generate
ongoing revenues and to retain local customer relationships. Humboldt's loan
servicing portfolio totaled $164 million, $199 million, and $243 million, at
December 31, 1999, 2000, and 2001, respectively.

Loan servicing includes collecting and remitting loan payments, accounting
for principal and interest, holding escrow and impound funds for payment of
taxes and insurance, making inspections as required of the

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mortgage premises, collecting amounts from delinquent mortgages, supervising
foreclosures in the event of unremedied defaults, and generally administering
the loans for investors to whom they have been sold.

Humboldt's fees for servicing mortgage loans range generally from .250% to
.375% per annum on the outstanding principal balances of the loans. Servicing
fees are collected and retained by Humboldt out of monthly mortgage payments.
Humboldt's servicing portfolio can be reduced by normal amortization and
prepayment or liquidation of outstanding loans.

Humboldt accounts for revenue from the sale of loans where servicing is
retained in conformity with the requirements of SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
Humboldt records an asset representing the right to service loans for others
when it sells a loan and retains the servicing rights. The carrying value of
loans is allocated between the loan and the servicing rights, based on their
relative fair values. Fair value is estimated by discounting estimated future
cash flows from the servicing assets using discount rates that approximate
current market rates and using current expected future prepayment rates. The
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing income, assuming prepayments.

The value of Humboldt's loan servicing portfolio may be adversely affected
as mortgage interest rates decline and loan prepayments increase. This would
also decrease income generated from Humboldt's loan servicing portfolio. This
negative effect on Humboldt's income attributable to existing servicing may be
offset somewhat by a rise in origination and servicing income attributable to
new loan originations, which historically have increased in periods of low
mortgage interest rates.

ASSET QUALITY AND NON-PERFORMING ASSETS

Humboldt manages asset quality and controls credit risk through
diversification of the loan portfolio and the application of policies designed
to promote sound underwriting and loan monitoring practices. Humboldt's loan
administration function is charged with monitoring asset quality, establishing
credit policies and procedures and enforcing the consistent application of these
policies and procedures at all of the Banks. The provision for loan losses
charged to earnings is based upon management's judgment of the amount necessary
to maintain the allowance at a level adequate to absorb probable losses. The
amount of provision charge is dependent upon many factors including loan growth,
net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of loan portfolio quality, general
economic conditions that can impact value of collateral, and other trends. The
evaluation of these factors is performed by the credit administration department
through an analysis of the adequacy of the allowance for loan losses. Reviews of
non-performing, past due loans and larger credits, designed to identify
potential charges to the allowance for loan losses, as well as determine the
adequacy of the allowance, are conducted on a quarterly basis during the year.
These reviews are performed by an independent consulting firm and credit
administration staff, and consider such factors as the financial strength of
borrowers, the value of the applicable collateral, past loan loss experience,
anticipated loan losses, growth in the loan portfolio, prevailing and
anticipated economic conditions and other factors.

There were no significant changes in the estimation methods and assumptions
used to determine the adequacy of the allowance for loan losses during 2001 or
2000. Additional information regarding the methodology used in determining the
adequacy of the allowance for loan losses in contained in Part I of this Report
in the section titled "Lending and Credit Functions."

Non-performing loans, which include non-accrual loans and accruing loans
past due over 90 days totaled $4.5 million at year-end 2001, compared with $3.8
million at December 31, 2000. At December 31, 2001, the ratio of non-performing
loans to total loans was 0.67%, compared with 0.65% at year-end 2000. Non-
performing assets, which include non-performing loans and foreclosed real
estate, totaled $4.6 million, or 0.67% of total assets, as of December 31, 2001,
compared with $4.7 million or 0.55% of total assets, at year-end 2000. Loans and
leases, including impaired loans and leases, are classified as nonaccrual if
collection of principal or interest is considered doubtful, generally if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans and leases are well-secured and in the
process of collection. When a loan is placed on non-accrual status, interest
previously accrued but not collected is

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reversed against current interest income. Depending on management's evaluation
of the borrower and loan collateral, interest on a non-accrual loan may be
recognized on a cash basis as payments are received. Loans made to facilitate
the sale of other real estate are made on terms comparable to loans of similar
risk. There were no commitments to lend additional funds to customers whose
loans were on non-accrual status at December 31, 2001. Table 9 summarizes
Humboldt non-performing assets for each of the last five years.

TABLE 9 -- NON-PERFORMING ASSETS

At December 31, 2001, Humboldt had approximately $11 million of loans which
were not classified as non-performing but for which known information about the
borrowers' financial condition caused management to have concern about the
ability of the borrowers to comply with the repayment terms of the loans. These
loans were identified through the loan review process described in the Asset
Quality and Risk Elements section of this Discussion above that provides for
assignment of a risk rating based on an eight-grade scale. Based on the
evaluation of current market conditions, loan collateral, other secondary
sources of repayment and cash flow generation, management does not anticipate
any significant losses related to these loans. These loans are subject to
continuing management attention and are considered in the determination of the
allowance for loan losses. A decline in the economic conditions in Humboldt's
market areas or other factors could adversely impact individual borrowers or the
loan portfolio in general. Accordingly, there can be no assurance that other
loans will not become 90 days or more past due, be placed on non-accrual or
other real estate owned in the future.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses ("ALL") totaled $5.5 million, $8.4 million,
and $9.8 million, for the years ended December 31, 1999, 2000, and 2001
respectively. The ALL as a percentage of total loans was 1.47%, 1.43%, and
1.47%, at December 31, 1999, 2000, and 2001 respectively. The ALL as a
percentage of non-performing loans as of December 31, 1999, 2000, and 2001 was
214%, 180%, and 210%. In connection with the Tehama merger, an additional
provision of $175,000 was recorded in order to conform Tehama Bank credit
policies to those of Humboldt.

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Table 10 provides a summary of activity in the ALL by type of loan for the
years indicated:

TABLE 10 -- SUMMARY OF LOAN LOSS EXPERIENCE

Management believes that the ALL at December 31, 2001 is sufficient to
absorb losses inherent in the loan portfolio as of that date based on the best
information available. This assessment involves uncertainty and judgment;
therefore, the adequacy of the ALL cannot be determined with precision and may
be subject to change in future periods. In addition, bank regulatory
authorities, as part of their periodic examination of the Banks, may require
additional charges to the provision for loan losses in future periods if the
results of their review warrant.

DEPOSITS

Total deposits were $807 million at December 31, 2001, compared with $713
million at year-end 2000. Total average deposits for 2001 were $778 million, an
increase of $105 million, or 16% from 2000. Average demand deposit accounts
increased $13 million, or 8%, and average interest bearing transaction accounts
(including savings and money market accounts) increased $69 million, or 38%,
from 2000. Average time deposits for 2001 were $342 million, an increase of 7%
from 2000. Growth in average deposits during 2001 was impacted by the
acquisition of Capitol Thrift & Loan in April 2000. This acquisition was
accounted for as a purchase and, accordingly, the deposits of Capitol Thrift &
Loan were included in Humboldt's balance sheet for only 9 months in 2000. Time
deposits of $100,000 and greater totaled $109 million at December 31, 2001,
compared with $121 million at year-end 2000. Table 11 sets forth the scheduled
maturities of time deposits of $100,000 and greater at December 31, 2001.

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TABLE 11 -- MATURITIES OF TIME DEPOSITS OF $100,000 AND GREATER

The deposit growth experienced during 2001 was primarily attributed to the
flow of funds out of stock and mutual fund investments by customers looking for
the safety and stability associated with insured bank deposit products. Rates
offered by Humboldt on its deposit products during 2001 were comparable with
those rates offered by other financial institutions in Humboldt's market area.
Management expects the level of deposit growth for 2002 to be substantially
lower than in 2001.

As of December 31, 2001, Humboldt had $5 million of brokered certificates
of deposit outstanding. The maturity date for this issuance is May 2002.
Management expects that brokered certificates of deposit will be used from time
to time in the future as an alternative source of funding with rates comparable
to local market rates. There were no brokered certificates of deposit
outstanding during 1999 or 2000.

OTHER BORROWINGS

At December 31, 2001, all of the Banks were shareholders in the Federal
Home Loan Bank of San Francisco ("FHLB"). Through this affiliation, advances
secured by investment securities and residential mortgage loans totaling $35
million were outstanding at rates competitive with time deposits of like
maturities, or federal funds for overnight borrowings. Management expects
continued utilization of this short and long-term source of funding. The FHLB
advances outstanding at December 31, 2001 had fixed interest rates ranging from
1.51% to 7.44%. Approximately $23 million, 63% of the FHLB advances mature prior
to December 31, 2002.

At December 31, 2001, Humboldt Bancorp had approximately $9.7 million of
amortizing term debt with maturity dates ranging from November 2002 to December
2004. Subsequent to December 31, 2001, a borrowing of approximately $6 million
was repaid in full with proceeds from the liquidation of automobile loans. Note
9 of the Notes to the Consolidated Financial Statements provides additional
information regarding Humboldt's borrowings.

Note 9 of the Notes to Consolidated Financial Statements provides the
amounts outstanding and general terms of Humboldt's borrowings, excluding Trust
Preferred Securities.

Humboldt had $20 million of Trust Preferred Securities outstanding at
December 31, 2001. The Trust Preferred Securities were issued as part of pooled
offerings to institutional investors. Table 12 presents information about
Humboldt's Trust Preferred Securities.

TABLE 12 -- TRUST PREFERRED SECURITIES

- ---------------

* Floating rate based on three-month LIBOR plus 360 basis points. As of December
31, 2001, the effective rate was 8.42%. Humboldt entered into a simultaneous
interest rate swap transaction that effectively converted the floating rate to
a fixed rate of 8.42% for five years. Additional information about the swap is
provided in Note 11 of the Notes to the Consolidated Financial Statements.

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Additional information regarding the terms of the Trust Preferred
Securities is provided in Note 10 of the Notes to the Consolidated Financial
Statements.

LIQUIDITY AND CASH FLOW

The objective of Humboldt's liquidity management is to maintain the Banks
ability to meet the day-to-day cash flow requirements of its customers who
either wish to withdraw funds or require funds to meet their credit needs.
Humboldt must manage its liquidity position to allow the subsidiary's to meet
the needs of their customers while maintaining an appropriate balance between
assets and liabilities to meet the return on investment expectations of its
shareholders. Humboldt monitors the sources and uses of funds on a daily basis
to maintain an acceptable liquidity position. In addition to liquidity from core
deposits and repayments and maturities of loans and investments, the Banks can
utilize established credit lines, sell securities under agreements to
repurchase, secure FHLB advances or purchase overnight Federal Funds.

Humboldt Bancorp is a company separate and apart from the Banks. It must
provide for its own liquidity. Substantially all of Humboldt Bancorp's revenues
are obtained from management fees and dividends declared and paid by the Banks.
There are statutory and regulatory provisions that could limit the ability of
the Banks to pay dividends to Humboldt Bancorp. Management of Humboldt Bancorp
believes that such restrictions will not have an impact on the ability of
Humboldt Bancorp to meet its ongoing cash obligations.

As disclosed in Humboldt's Consolidated Statements of Cash Flows, net cash
used in operating activities was approximately $6 million during 2001. The major
uses of cash used in operating activities are net loss and the increase in other
receivables and other assets. During 2001, Humboldt had operating cash outflows
of $14 million in connection with the operation and wind-down of Bancorp
Financial Services, Inc. ("BFS"). The cash contributions to BFS were made to
fund the operations of the BFS prior to announcement of the wind-down in June
2001 and as part of the wind-down of the company. Management does not expect
that cash outflows in 2002 related to completion of the BFS wind-down will
exceed $2 million.

Net cash used in investing activities of $107 million consisted primarily
of a net increase in loans of $83 million and securities purchases of $112
million funded largely by sales, maturities and paydowns of securities of $78
million. Net cash provided by financing activities provided the remainder of
funding sources for 2001. The $108 million of net cash provided by financing
activities consisted primarily of a $94 million net increase in deposits, a net
decrease in borrowings of $2 million and the issuance of $15 million of Trust
Preferred Securities.

As of December 31, 2001, the Banks had $23.5 million in available federal
funds lines of credit and approximately $90 million in secured borrowing
availability from the FHLB. Humboldt Bancorp had borrowing availability of $8
million under two lines of credit as of December 31, 2001. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon
the total commitment amounts do not necessarily represent future cash
requirements. Commitments to extend credit, credit card arrangements, and
standby letters of credit as of December 31, 2001 were $116.6 million, $11.4
million and $2.4 million respectively.

CAPITAL RESOURCES

Stockholders' equity at December 31, 2001 was $66.8 million, a decrease of
$6.2 million, or 8.5%, from December 31, 2000. The decrease in stockholders'
equity during 2001 was principally due to the net loss of $6.0 million incurred
for the year 2001. Book value per share as of December 31, 2001 was $6.39.

The Board of Governors of the Federal Reserve System has issued guidelines
for the implementation of risk-based capital requirements by U.S. banks and bank
holding companies. These risk-based capital guidelines take into consideration
risk factors, as defined by regulators, associated with various categories of
assets, both on and off balance sheet. Under the guidelines, capital strength is
measured in two tiers which are used in conjunction with risk adjusted assets to
determine the risk based capital ratios. The guidelines require

A-17

an 8% total risk-based capital ratio, of which 4% must be Tier I capital.
Humboldt's Tier I capital, which consists of stockholders' equity and qualifying
trust preferred securities less other comprehensive income, goodwill and
deposit-based intangibles, totaled to $83 million at December 31, 2001. Tier II
capital components include supplemental capital components such as a qualifying
allowance for loan losses and qualifying subordinated debt. Tier I capital plus
Tier II capital components is referred to as Total Risk-based Capital, and was
$92 million at December 31, 2001. The percentage ratios, as calculated under the
guidelines, were 10.76% and 12.01% for Tier I and Total Risk-based Capital,
respectively, at December 31, 2001. A minimum leverage ratio is required in
addition to the risk-based capital standards and is defined as period end
stockholders' equity and qualifying trust preferred securities, less other
comprehensive income, goodwill and deposit-based intangibles divided by average
assets adjusted for goodwill and other intangible assets.

Although a minimum leverage ratio of 4% is required for the highest-rated
bank holding companies which are not undertaking significant expansion programs,
the Federal Reserve Board requires a bank holding company to maintain a leverage
ratio greater than 4% if it is experiencing or anticipating significant growth
or is operating with less than well-diversified risks in the opinion of the
Federal Reserve Board. The Federal Reserve Board uses the leverage and
risk-based capital ratios to assess capital adequacy of banks and bank holding
companies. Humboldt's leverage ratios at December 31, 2000 and 2001 were 8.97%
and 8.68%, respectively.

Humboldt has never paid a cash dividend. Any decision to pay cash dividends
in the future will be based on Humboldt's results of operations, growth
expectations, financial condition, regulatory constraints and other factors
considered important by the Board of Directors.

All three of the capital ratios of Humboldt and the Banks currently exceed
the minimum ratios required in 2001 as defined by federal regulation. Management
monitors these ratios to ensure that Humboldt and the Banks remain within
regulatory guidelines. Further information regarding the actual and required
capital ratios of Humboldt and the Banks is provided in Note 20 in the Notes to
the Consolidated Financial Statements

On February 6, 2002, Humboldt announced a common stock repurchase program
that authorized the repurchase of up to 500,000 shares of Humboldt common stock
in open market or private transactions. Management expects that the repurchase
plan will be completed by December 31, 2002.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The absolute level and volatility of interest rates can have a significant
impact on Humboldt's profitability. The objective of interest rate risk
management is to identify and manage the sensitivity of net interest income to
changing interest rates to achieve Humboldt's overall financial objectives.
Based on economic conditions, asset quality and various other considerations,
management establishes tolerance ranges for interest rate sensitivity and
manages within these ranges. Humboldt's net interest income and the fair value
of its financial instruments are influenced by changes in the level of interest
rates. Humboldt manages its exposure to fluctuations in interest rates through
policies established by Asset/Liability Management Committee ("ALCO"). The ALCO
meets periodically and has responsibility for approving asset/liability
management policies, formulating and implementing strategies to improve balance
sheet positioning and/or earnings and reviewing interest rate sensitivity. The
ALCO reports are provided to the Boards of Directors of Humboldt and the Banks
on a regular basis.

Management utilizes an interest rate simulation model to estimate the
sensitivity of net interest income to changes in interest rates. Such estimates
are based upon a number of assumptions for each scenario, including the level of
balance sheet growth, deposit repricing characteristics and the rate of
prepayments. Interest rate sensitivity is a function of the repricing
characteristics of Humboldt's portfolio of assets and liabilities. These
repricing characteristics are the time frames within which the interest bearing
assets and liabilities are subject to change in interest rates either at
replacement, repricing or maturity during the life of the instruments. Interest
rate sensitivity management focuses on the maturity structure of assets and
liabilities and their repricing characteristics during periods of changes in
market interest rates. Effective interest rate sensitivity management seeks to
ensure that both assets and liabilities respond to changes in interest rates
within an

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acceptable timeframe, thereby minimizing the impact of interest rate changes on
net interest income. Interest rate sensitivity is measured as the difference
between the volumes of assets and liabilities in Humboldt's current portfolio
that are subject to repricing at various time horizons: immediate; one to three
months; four to twelve months; one to five years; over five years, and on a
cumulative basis. The differences are known as interest sensitivity gaps. Table
13 sets forth interest sensitivity gaps for these different intervals as of
December 31, 2001.

TABLE 13 -- GAP

As seen in the preceding table, during the first year 67% of interest
bearing liabilities will reprice compared with 26% of all interest earning
assets. Changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting interest
rate sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and the liability remains the same, thus impacting net interest
income. This characteristic is referred to as basis risk and generally relates
to the possibility that the repricing characteristics of short-term assets tied
to Humboldt's prime lending rate are different from those of short-term funding
sources such as certificates of deposit. Varying interest rate environments can
create unexpected changes in prepayment levels of assets and liabilities that
are not reflected in the interest rate sensitivity analysis. These prepayments
may have significant impact on Humboldt's net interest margin. Because of these
factors, an interest sensitivity gap analysis may not provide an accurate
assessment of Humboldt's exposure to changes in interest rates.

Humboldt utilizes an interest rate simulation model to monitor and evaluate
the impact of changing interest rates on net interest income. The estimated
impact on Humboldt's net interest income over a time horizon of one year as of
December 31, 2001 is indicated in Table 14. The interest rate simulation assumes
a parallel and sustained shift in interest rates of 200 basis points (ramped up
by 18 basis points per month until the increase totals 200 basis points) and no
change in the composition or size of Humboldt's balance sheet. In

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addition, the simulation includes the impact of a $25 million interest rate swap
contract that is described below.

TABLE 14

To assist in achieving a desired level of interest rate sensitivity,
Humboldt has entered into off-balance sheet contracts that are considered
derivative financial instruments. Derivative financial instruments can be a cost
and capital effective means of modifying the repricing characteristics of
on-balance sheet assets and liabilities. As of December 31, 2001, Humboldt had
one interest rate swap contract with a notional amount of $10 million. Under the
terms of the contract, Humboldt pays a fixed rate of 8.42% in exchange for
receiving a variable rate of three-month LIBOR plus 360 basis points on the
notional amount for a term of five years. Humboldt entered into this swap
agreement in connection with the issuance of $10 million of floating rate trust
preferred securities in order to fix the interest cost for the first five years,
at which time Humboldt has the right to call the trust preferred securities.

Subsequent to December 31, 2001, Humboldt entered into an interest rate
swap contract with a notional amount of $25 million. Under the terms of the
contract, Humboldt will pay Prime rate and receive a fixed rate of 6.72% on the
notional amount for a term of three years. Humboldt entered into this swap
agreement to hedge the interest rate risk associated with a like amount of Prime
floating loans.

Humboldt has adopted SFAS No. 133, Accounting for Derivative and Hedging
Activities, as amended by SFAS No. 138, which requires all derivative financial
instruments be included and recorded at fair value on the balance sheet.
Currently, all of Humboldt's derivative financial instruments are classified as
cash flow hedges. Management expects that both interest rate swap contracts will
meet the requirements of SFAS No. 133/138 that provide for any change in the
market value of the contracts to be recorded as a component of other
comprehensive income in the equity section of the balance sheet.

At December 31, 2001, Humboldt's derivative financial instrument had an
aggregate positive fair value of approximately $146,000. Humboldt's policy
requires all derivative financial instruments be used only for asset/ liability
management through the hedging of specific transactions or positions, and not
for trading or speculative purposes. Management believes that the risk
associated with using derivative financial instruments to mitigate interest rate
risk sensitivity is minimal and should not have any material unintended impact
on Humboldt's financial condition or results of operations.

Although the gap position is negative during the first twelve months after
December 31, 2001, management believes that Humboldt is somewhat asset sensitive
based on the interest rate simulation model and has an acceptable level of
interest rate risk. Based on the simulation model net income should increase
slightly when rates increase and shrink somewhat when rates fall. This is
because of the concentration of variable rate and short-term commercial loans in
Humboldt's portfolio. However, there can be no assurance that fluctuations in
interest rates will not have a material adverse impact on Humboldt.

IMPACT OF INFLATION AND CHANGING PRICES

A financial institution's asset and liability structure is substantially
different from that of an industrial firm in that primarily all assets and
liabilities of a bank are monetary in nature, with relatively little investments
in fixed assets or inventories. Inflation has an important impact on the growth
of total assets and the resulting need to increase equity capital at higher than
normal rates in order to maintain an appropriate equity to assets ratio.
Management believes the impact of inflation on financial results depends on
Humboldt's ability to react to changes in interest rates and, by such reaction,
reduce the inflationary impact on

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performance. Humboldt has an asset/liability management program which attempts
to manage interest rate sensitivity. In addition, periodic reviews of banking
services and products are conducted to adjust pricing in view of current and
expected costs

DISCONTINUED OPERATIONS

Bancorp Financial Services, Inc. ("BFS") was originally capitalized in 1996
with $2,000,000 contributions from both Humboldt Bancorp and Tehama Bancorp.
Upon the completion of the Tehama Bancorp merger in March 2001, Humboldt became
the sole shareholder of BFS. During the first quarter of 2001, Humboldt's Board
of Directors completed a strategic review of BFS, which principally acquired and
serviced small ticket leases on a nationwide basis. This review was initiated in
response to a number of factors, including the increased regulatory burden
associated with BFS being a wholly owned subsidiary after completion of the
Tehama Bancorp merger, future capital needs of BFS to support its growth and
reliance upon the lease-backed securities market for liquidity. As a result of
this review, Humboldt adopted a plan to discontinue the operations of BFS by
sale of the company and engaged an investment banking firm to facilitate the
sale during the first quarter of 2001. A valuation reserve of $700,000, net of
tax, was recorded during the first quarter of 2001 based on an estimate of the
value of BFS as a going concern. The operating results of BFS are included, net
of tax, in the income statement as income (loss) from discontinued operations.

During the second quarter of 2001 Humboldt was notified by the investment
banker that the prospects for the sale of BFS as a going concern were unlikely.
In response, Humboldt adopted a plan to wind-down the operations of BFS in an
orderly manner. This plan included the immediate termination of all lease and
loan acquisition activities. In connection with the wind-down plan, Humboldt
recognized a loss on discontinued operations, net of tax, of $13.5 million
during the second quarter of 2001.

The following is a summary of the major components of the wind-down charge
(dollars in thousands):

Write-off of retained interests/servicing assets............ $11,798
Provision for lease/loan losses............................. 4,679
Lease/loan market value adjustments......................... 1,580
Professional fees........................................... 470
Other....................................................... 1,315
Tax Effect.................................................. (5,848)
-------
Total wind-down expense................................... $13,994
=======

During the third quarter BFS sold approximately $5,800,000 of lease
receivables to an unrelated third party and paid down a like amount of bank
debt. Since a valuation reserve was provided during the second quarter, there
was no gain or loss recorded on the sale. Humboldt Bancorp agreed to guarantee
certain representations and warranties with respect to the underlying leases
subject to the sale. In addition, the servicing responsibilities of BFS for
approximately 5,400 leases under certain securitization servicing agreements
were transferred to a third party effective August 31, 2001. This servicing
transfer permitted BFS to relocate to a smaller facility and significantly
reduce staff levels.

As of December 31, 2001, BFS had total assets of $7,577,000, which included
cash of $1,634,000, lease receivables of $1,085,000, lease-backed notes of
$4,143,000, deferred tax assets of $600,000 and other assets of $115,000. Total
liabilities as of December 31, 2001 were $8,992,000 and included, non-bank
secured borrowings of $5,960,000, security deposits of $1,242,000, lease and
loan payment servicing liabilities of $866,000, wind down accruals of $800,000
and other liabilities of $124,000.

In addition to the assets of BFS, certain assets of Humboldt Bancorp which
were acquired from or on behalf of BFS were included as assets related to
discontinued operations. During the fourth quarter of 2001, Humboldt Bancorp
agreed to assume certain debt of BFS, which was previously guaranteed, in
exchange for ownership of approximately $7,000,000 of automobile loans that
secured the borrowing. In addition, Humboldt Bancorp agreed to repurchase
approximately $2,000,000 of automobile loan contracts that were

A-21

originated by BFS and sold to an unaffiliated financial institution during the
fourth quarter of 2001. These loans had a valuation allowance of approximately
$1,000,000.

As of December 31, 2001, Humboldt Bancorp had net automobile loans acquired
from BFS and repurchased from third parties of approximately $9,000,000.
Subsequent to December 31, 2001, Humboldt Bancorp completed the sale of the
loans and certain balances previously charged off to a third party. The
valuation reserve carried by Humboldt Bancorp against the automobile loans was
sufficient so that no material gain or loss was recorded as a result of the
sale.

As of December 31, 2001 BFS had borrowings from two unrelated non-bank
lenders totaling $5,960,000. Neither of these two borrowings is guaranteed by
Humboldt Bancorp. One of the borrowings was originally structured as a loan to
an unconsolidated, bankruptcy-remote subsidiary of BFS as a commercial paper
conduit facility for funding the acquisition of lease contracts. This facility
matured on March 31, 2001 and has not been extended. As of December 31, 2001,
the balance outstanding on this loan is $884,000, a reduction of approximately
$3,575,000 from June 30, 2001. The reduction in the balance is due to the
scheduled repayments received on the underlying lease collateral of
approximately $475,000 and the repurchase of approximately $3,100,000 of
underlying leases at par value that did not meet certain eligibility
requirements. The leases repurchased by BFS were resold the same day to an
unrelated third party. BFS did not incur any loss on this sale since a market
valuation reserve was established during the second quarter.

The second non-bank borrowing was obtained in February 2001 in connection
with the issuance of term leased-backed notes. The placement agent was able to
place approximately $4,600,000 million of the Class C leased-backed notes with a
non-affiliated investor; however, due to certain restrictions contained in the
indenture, the transaction had to be structured as a secured borrowing. The
result of the transaction on the balance sheet of BFS was the establishment of
an asset for the Class C leased-backed notes and a related liability for
$4,600,000. This secured borrowing agreement also contained a provision whereby
BFS was permitted, for a certain period of time, to retain the monthly principal
and interest cash flows received on the leased-backed notes. These retained cash
flows were converted to a subordinated note secured by retained interest assets
of BFS. The principal portion of the cash flows were applied to reduce the
$4,600,000 million liability and along with the interest portion were added to
the subordinated debt. As of December 31, 2001 the Class C secured borrowing
totaled $3,911,000 and the subordinated borrowing totaled $1,165,000.

Subsequent to December 31, 2001, BFS and the non-affiliated investor
executed an agreement whereby the investor took certain actions that permitted
the transfer of ownership of the Class C leased-backed notes to an unrelated
third party in satisfaction of the $3,911,000 of related debt. This agreement
also provided for the transfer of the $1,165,000 to a new subordinated loan in
favor of the third party. This new subordinated loan will bear interest at 12%
compounded annually, with repayment of principal and interest tied solely to the
receipt, if any, of cash flows from retained interest cash flows received by BFS
in the future.

During the second quarter of 2001, Humboldt guaranteed BFS borrowings from
two commercial banks in consideration for modification of the loan terms and
elimination of financial covenants. During the fourth quarter of 2001, Humboldt
assumed the debt directly related to the financing of certain automobile loans
contracts in the amount of $6,400,000 and a deficiency balance related to a loan
that was previously secured by lease contracts for $300,000. Subsequent to
December 31, 2001, Humboldt sold the automobile loan contracts securing the one
loan, and the proceeds were used to pay the loan in full. Additional information
on these borrowings is included in Note 9 of the Notes to the Consolidated
Financial Statements.

Humboldt and BFS established accruals for expected costs related to the
wind-down during the second quarter of 2001. As of December 31, 2001, the
remaining balance of the wind-down accrual was approximately $800,000. This
accrual includes severance, operating costs and certain professional fees.
Management believes the accrual for wind-down expenses is sufficient to cover
the remaining wind-down costs.

The final disposal of the remaining assets of BFS is expected to be
substantially completed by March 31, 2002. Management is in the process of
marketing the remaining lease receivables and the previously charged-off lease
receivables.

A-22

In conducting its business, BFS formed three subsidiaries that are
considered "Special Purpose Entities" or "SPEs." These subsidiaries were formed
in accordance with legal requirements and were, at formation, not subject to
consolidation on the financial statements of BFS.

BFS Funding Company, LLC and BFS Funding Company II, LLC are considered
"qualifying" SPEs under SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.

All retained interest assets related to the lease-backed notes issued by
BFS Funding Company LLC and BFS Funding Company II, LLC were written off during
the second quarter of 2001. At December 31, 2001, Humboldt Bancorp owned the
Class C notes issued in the 2000 and 2001 securitizations for which there is no
active market. The 2000 Class C lease-backed note were carried at a value of
$3,031,000 as of December 31, 2001 and will not receive any payments of interest
or principal until the holders of the Class A and Class B notes are paid in
full. Management expects that the principal and interest payments on the 2000
Class C lease-backed notes will be received during the fourth quarter of 2003
and first quarter of 2004. As described above, subsequent to December 31, 2001,
an agreement was executed resulting in the transfer of the 2001 Class C
lease-backed notes to an unaffiliated third party in consideration for reduction
of related debt owed to the purchaser. No gain or loss was recorded in
connection with the transfer.

RECENT ACCOUNTING DEVELOPMENTS

During June 2001, the FASB issued Statement of Financial Accounting
Standards SFAS No. 141, Accounting for Business Combinations. This statement
requires that all business combinations be accounted for under the purchase
method. Use of pooling-of-interest is no longer permitted. Statement 141
requires that the purchase method be used for business combinations initiated
after June 30, 2001. The change in accounting for business combinations should
not have a negative impact on Humboldt's ability to realize its current business
strategy.

During June 2001, the FASB issued SFAS No. 142, Accounting for Goodwill and
Other Intangible Assets. This statement requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment. This change
provides investors with greater transparency regarding the economic value of
goodwill and its impact on earnings. The amortization of goodwill ceases upon
adoption of the Statement, January 1, 2002. Implementation of accounting for
goodwill is not expected to have a material effect on Humboldt's financial
position or results of operations. Humboldt adopted the statement on January
1st, 2002 and it did not have a material effect on its financial position.

As of December 31, 2001, Humboldt had $262 thousand in goodwill, which the
company will cease amortizing in compliance with the statement.

A-23

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Humboldt Bancorp and Subsidiaries:

We have audited the accompanying consolidated balance sheet of Humboldt
Bancorp and Subsidiaries (the Company) as of December 31, 2001 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of the Company as of December 31, 2000 and for
each of the years in the two-year period then ended, prior to their restatement
for the 2001 pooling-of-interests transaction described in note 2 to the
consolidated financial statements, were audited by other auditors whose report
dated January 12, 2001, expressed an unqualified opinion on those financial
statements. Separate financial statements of Tehama Bancorp as of December 31,
2000 and for each of the years in the two year period then ended also included
in the 2000 and 1999 restated consolidated financial statements were audited by
other auditors whose report dated January 26, 2001, expressed an unqualified
opinion of those financial statements.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the 2001 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Humboldt Bancorp and Subsidiaries as of December 31, 2001 and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

We also audited the combination of the accompanying consolidated financial
statements as of December 31, 2000, and for each of the years in the two-year
period then ended, after restatement for the 2001 pooling-of-interests
transaction; in our opinion, such consolidated financial statements have been
properly combined on the basis described in note 2 of the notes to the
consolidated financial statements.

KPMG SIGNATURE

Sacramento, California
January 25, 2002

A-24

RICHARDSON & COMPANY
550 Howe Avenue, Suite 210
Sacramento, California 95825
Telephone: (916) 564-8727
FAX: (916) 564-8728

INDEPENDENT AUDITOR'S REPORT

Board of Directors
Humboldt Bancorp and Subsidiaries
Eureka, California

We have audited the accompanying consolidated balance sheets of Humboldt
Bancorp (Bancorp) and Subsidiaries as of December 31, 1999 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Bancorp's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Humboldt
Bancorp and Subsidiaries at December 31, 1999 and 2000, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2000, in conformity with generally
accepted accounting principles.

/s/ RICHARDSON & COMPANY

January 12, 2001, except for Note X, as to
which the date is March 12, 2001

A-25

INDEPENDENT AUDITOR'S REPORT
The Board of Directors
and Shareholders
Tehama Bancorp and Subsidiary

We have audited the consolidated balance sheet of Tehama Bancorp and
subsidiary as of December 31, 2000, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the years in
the two-year period ended December 31, 2000 prior to the restatement (and,
therefore, are not presented herein) for the merger with Humboldt Bancorp on
March 9, 2001, which was accounted for as a pooling of interests (see Note 2 to
the restated financial statements). These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tehama Bancorp and subsidiary as of December 31, 2000, and the consolidated
results of their operations and their cash flows for each of the years in the
two year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.

/S/ PERRY-SMITH LLP

Sacramento, California
January 26, 2001

A-26

HUMBOLDT BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001

The accompanying notes are an integral part of these consolidated financial
statements.

A-27

HUMBOLDT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

The accompanying notes are an integral part of these consolidated financial
statements.

A-28

HUMBOLDT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001

The accompanying notes are an integral part of these consolidated financial
statements.

A-29

HUMBOLDT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

The accompanying notes are an integral part of these consolidated financial
statements.

A-30

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 2001

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

Business: Humboldt Bancorp ("Humboldt") is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiaries, Humboldt Bank, Capitol Valley Bank, Capitol Thrift & Loan and
Tehama Bank (collectively, "Banks"). Humboldt and the Banks are subject to
regulation, supervision and regular examination by the Federal Reserve Bank, the
California Department of Financial Institutions and the Federal Deposit
Insurance Corporation. The regulations of these agencies govern most aspects of
the Banks' business. The accounting and reporting policies of Humboldt Bancorp
and Subsidiaries conform with generally accepted accounting principles.

Principles of Consolidation: The consolidated financial statements include
the accounts of Humboldt and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.

Nature of Operations: The Banks provide general commercial banking
services at 25 locations, generally located throughout Northern California.
These banking services include accepting deposit accounts (demand, time and
savings), and making secured and unsecured loans to businesses and individuals.
Other significant business operations of Humboldt include merchant credit card
transaction processing for businesses throughout the United States and automated
teller machine (ATM) funding activities by sponsoring non-bank companies who
maintain ATM machines throughout the United States.

Significant Management Estimates: The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. For the Bank, the significant accounting estimate
is the allowance for loan losses. See "Allowance for Loan and Lease Losses"
below.

Investment Securities: Securities are classified as held-to-maturity if
Humboldt has both the intent and ability to hold those debt securities to
maturity regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost adjusted
for amortization of premium and accretion of discount, computed by the effective
interest method over their contractual lives.

Securities are classified as available-for-sale if Humboldt intends to hold
those debt securities for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of assets and liabilities, liquidity needs,
regulatory capital considerations and other similar factors. Securities
available-for-sale are carried at fair value. Unrealized holding gains or losses
are included in other comprehensive income as a separate component of
stockholders' equity, net of tax. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are included in earnings.
Unrealized losses due to fluctuations in fair value of securities held to
maturity or available for sale, are recognized through earnings when it is
determined that a permanent decline in value has occurred. Humboldt did not have
any securities classified as trading securities during 1999, 2000 or 2001.
Premiums and discounts are amortized or accreted over the life of the related
investment security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.

Loans and Leases Held for Sale: Humboldt sells or transfers mortgage
loans, the guaranteed portion of Small Business Administration
("SBA") -- guaranteed loans and loan participations (with servicing retained)
for cash proceeds equal to the principal amount of loans, participation or
leases with yield rates to the investor based upon the current market rates.
Transfers of mortgage loans held for sale in which Humboldt surrenders control
over those loans are accounted for as a sale to the extent that consideration
other than beneficial interests in the transferred loans is received in
exchange. Humboldt records an asset representing the right to service loans for
others when it sells a loan and retains the servicing rights. The carrying value
of

A-31

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

loans is allocated between the loan and the servicing rights, based on their
relative fair values. Fair value of servicing rights is estimated by discounting
estimated future cash flows from servicing using discount rates that approximate
current market rates and using estimated prepayment rates. The servicing rights
are carried at the lower of cost or market and are amortized in proportion to,
and over the period of, the estimated net servicing income, assuming
prepayments. Humboldt's loan servicing portfolio totaled $164 million, $199
million, and $243 million, at December 31, 1999, 2000, and 2001, respectively.

For purposes of evaluating and measuring impairment, servicing rights are
stratified based on the underlying loan type and note rate and compared to a
valuation model based on a discounted cash flow methodology, current prepayment
speeds and market discount rate. Any impairment is measured as the amount by
which the carrying value of servicing rights for a stratum exceeds its fair
value.

A premium over the adjusted carrying value is received upon the sale of the
guaranteed portion of an SBA loan. Humboldt's investment in an SBA loan is
allocated among the sold and retained portions of the loan based on the relative
fair value of each portion at the time of loan origination, adjusted for
payments and other activities. Because the portion retained does not carry an
SBA guarantee, part of the gain recognized on the sold portion of the loan may
be deferred and amortized as a yield enhancement on the retained portion in
order to obtain a market equivalent yield.

Loans and leases held for sale are recorded at the lower of cost or market
determined on an aggregate basis. The amount of loans held for sale as of
December 31, 2000 and 2001 was $373,000 and none, respectively.

Loans and Leases: Loans and leases are stated at the amount of unpaid
principal, less the allowance for losses, net deferred loan fees and costs and
unearned income. Interest on loans is accrued and credited to income based on
the principal amount outstanding. Unearned income on installment loans is
recognized as income over the term of the loans using a method that approximates
the interest method.

Loan origination fees and certain direct origination and acquisition costs
are capitalized and recognized as an adjustment of the yield on the related loan
or lease. Amortization is discontinued when the loan or lease is placed on
nonaccrual status.

Allowance for Loan and Lease Losses: The allowance is maintained at a
level, which, in the opinion of management, is adequate to absorb probable
losses inherent in the loan portfolio, including credit card receivables and
lease portfolios. Management determines the adequacy of the allowance based upon
reviews of individual loans, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans and
leases and other pertinent factors. The allowance is based on estimates, and
ultimate losses may vary from the current estimates. These estimates are
evaluated on a regular basis and, as adjustments become necessary, they are
reported in earnings in the periods in which they become known. Loans and leases
deemed uncollectible are charged to the allowance. Credit card receivables are
charged to the allowance when they become 120 days past due. Provisions for
losses and recoveries on loans and leases previously charged off are added to
the allowance.

Loans are considered impaired, based on current information and events, if
it is probable that Humboldt will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Allowances on impaired loans are established based on the present
value of expected future cash flows discounted at the loans effective interest
rate or for collateral-dependent loans, on the fair value of the collateral.
Cash receipts on impaired loans are used to reduce principal.

Income Recognition on Impaired and Nonaccrual Loans and Leases: Loans and
leases, including impaired loans and leases, are classified as nonaccrual if
collection of principal or interest is considered doubtful, generally if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans and leases are well-secured and in the
process of collection. If a loan or lease or

A-32

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

a portion of a loan or lease is classified as doubtful or is partially charged
off, the loan or lease is classified as nonaccrual. Loans that are on a current
payment status or past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal and/or interest is in doubt.

Loans and leases may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are brought fully
current, and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest and principal.

While a loan or lease is classified as nonaccrual and the future
collectibility of the recorded balance is doubtful, collections of interest and
principal are generally applied as a reduction to principal outstanding.
Uncollected accrued interest on nonaccrual loans is reversed against interest
income. When the future collectibility of the recorded balance is expected,
interest income may be recognized on a cash basis.

Merchant Card Banking: Merchant Bankcard revenue is based on the volume of
transactions processed and is recorded on a cash basis.

Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method over the estimated useful lives of the related assets. The
useful lives of buildings and improvements are estimated to be fifteen to thirty
years. The useful lives of furniture, fixtures and equipment are estimated to be
three to ten years. Leasehold improvements are amortized over the life of the
related lease, or the life of the asset, whichever is shorter. When assets are
sold or otherwise disposed of, the cost and related accumulated depreciation and
amortization are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and repairs is
charged to expense as incurred.

Other Real Estate Owned: Other real estate owned represents real estate
which Humboldt has taken control of in partial or full satisfaction of loans. At
the time of foreclosure, other real estate owned is recorded at the lower of the
carrying amount or fair value less costs to sell, which becomes the property's
new basis. Any write-downs based on the asset's fair value at date of
acquisition are charged to the allowance for loan losses. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of their new cost basis or fair value minus estimated costs
to sell. Revenue and expenses from operations and subsequent adjustments to the
carrying amount of the property are included in income (loss) on other real
estate owned.

In some instances, Humboldt makes loans to facilitate the sales of other
real estate owned. Management reviews all sales for which it is the lending
institution for compliance with sales treatment under provisions established by
SFAS No. 66, Accounting for Sales of Real Estate.

Intangible Assets: Core deposit intangibles, which represent the net
present value of the future economic benefits related to purchased deposits, are
amortized on a straight-line basis over periods ranging from eight to ten years.
Humboldt carried $2.9 million and $2.3 million in core deposit intangibles in
other assets as of December 31, 2000 and 2001 respectively. Other intangibles
related to purchased merchant credit card relationships are amortized over the
expected life of the contract, which does not exceed four years.

During June 2001, the FASB issued SFAS No. 142, Accounting for Goodwill and
Other Intangible Assets. This statement requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment. The amortization
of goodwill ceases upon adoption of the Statement on January 1, 2002. Humboldt
adopted the statement on January 1st, 2002 and it did not have a material effect
on its financial position.

As of December 31, 2001, Humboldt had $262 thousand in goodwill, which the
company will cease amortizing in compliance with the statement.

A-33

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Derivative Financial Instruments: On January 1, 2001, Humboldt adopted
Statement of Financial Standards Board (FASB) No. 133, Accounting for
Derivatives and Hedging Activities and FASB Statement No. 138 Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment of
FASB Statement No. 133. All derivative instruments (including certain derivative
instrument's embedded in other contracts) are recognized in the consolidated
balance sheet at fair value. FASB 133 dictates that the accounting treatment for
gains or losses from changes in the derivative instrument's fair value is
contingent on whether the derivative instrument qualifies as a hedge under the
accounting standard. On the date Humboldt enters into a derivative contract,
Humboldt designates the derivative instruments as (1) a hedge of the fair value
of a recognized asset or liability or of an unrecognized firm commitment (fair
value hedge), (2) a hedge of a forecasted transaction or of the variability of
cash flows to be received or paid related to a recognized asset or liability
(cash flow hedge) or (3) hedge for trading, customer accommodation or not
qualifying for hedge accounting (free-standing derivative instruments). For a
fair value hedge, changes in the far value of the derivative instrument and
changes in the fair value of the hedged asset or liability or of an unrecognized
firm commitment attributable to the hedged risk are recorded in current period
net income. For a cash flow hedge, changes in the fair value of the derivative
instrument to the extent that it is effective are recorded in other
comprehensive income, net of tax, within shareholders' equity and subsequently
reclassified to net income in the same period(s) that the hedged transaction
impacts net income. For free-standing derivative instruments, changes in the
fair values are reported in current period net income. Humboldt formally
documents the relationship between hedging instruments and hedged items, as well
as the risk management objective and strategy for undertaking any hedge
transaction. This process includes linking all derivative instruments that are
designated as fair value or cash flow hedges to specific assets and liabilities
on the balance sheet or to specific forecasted transactions. Humboldt also
formally assesses both at the inception of the hedge and on an ongoing basis,
whether the derivative instruments used are highly effective in offsetting
changes in fair values or cash flows of hedged items. If it is determined that
the derivative instrument is not highly effective as a hedge, hedge accounting
is discontinued. There was no effect related to adoption as of January 1, 2001.

Investments in Limited Partnerships: Humboldt owns approximately 99%
interests in two limited partnerships that own and operate affordable housing
projects. Investment in these projects serves as an element of Humboldt's
compliance with the Community Reinvestment Act and Humboldt receives tax
benefits in the form of deductions for operating losses and tax credits. The tax
credits may be used to reduce taxes currently payable or may be carried back one
year or forward twenty years to recapture or reduce taxes. Bancorp uses the
equity method of accounting for the partnerships' operating results and tax
credits are recorded in the years they became available to reduce income taxes.

Income Taxes: Provisions for income taxes are based on amounts reported in
the statements of operations (after exclusion of non-taxable income such as
interest on state and municipal loans and securities) and include deferred taxes
on temporary differences in the recognition of income and expense for tax and
financial statement purposes.

Deferred taxes are computed using the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are recognized for deductible temporary
differences and tax credit carryforwards, and then a valuation allowance is
established to reduce that deferred tax asset if it is "more likely than not"
that the related tax benefits will not be realized.

Earnings Per Share: Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period, after giving retroactive effect to stock dividends and splits. Diluted
earnings per share is computed similar to basic earnings per share except that
the

A-34

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. Included in the denominator is the dilutive effect of stock options
computed under the treasury stock method.

Off-Balance-Sheet Financial Instruments: In the ordinary course of
business, Humboldt issues commitments to extend credit, commitments under credit
card arrangements and standby letters of credit. Cash and Equivalents: For the
purpose of presentation in the consolidated Statement of Cash Flows, cash and
cash equivalents include cash, balances due from banks and certificates of
deposit with maturity dates of 90 days or less. Cash and due from banks include
amounts the Banks are required to maintain to meet certain average reserve and
compensating balance requirements of the Federal Reserve. The total requirements
at December 31, 2000 and 2001 were $12,869,000 and $13,128,000 respectively.

Stock-Based Compensation: Humboldt has various stock-based compensation
plans that authorize the granting of stock options, restricted stock and other
stock-based awards to eligible employees and directors. These plans are
accounted for under the intrinsic value method as prescribed in APB Opinion No.
25, Accounting for Stock Issued to Employees. Included in Note 17 are the pro
forma disclosures required by SFAS No. 123, Accounting for Stock-Based
Compensation, which assumes the fair value method of accounting had been
adopted.

NOTE 2 -- MERGERS & ACQUISITIONS

Effective March 9, 2001, Humboldt acquired, for 3.73 million shares of its
common stock and approximately $220,000 in cash, all of the outstanding common
stock of Tehama Bancorp ("Tehama"), a one-bank holding company, based in Red
Bluff, California. Each share of Tehama common stock was converted into and
exchanged for 1.775 shares of Humboldt common stock. The cash consideration paid
was to Tehama shareholders that exercised their dissenters' rights. This merger
was accounted for as a pooling of interests and, accordingly, all financial
information contained in this Report is has been restated to reflect the
combination of Humboldt and Tehama for all periods presented.

The following is a reconciliation of the amounts of net interest income and
net earnings previously reported with the restated amounts (in thousands):

A-35

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Humboldt recorded operating expenses related to the merger and integration
of Tehama in the amount of $3,531,000 on a pre-tax basis. The following table
presents the major components of merger-related expenses (dollars in thousands):

Severance & related......................................... $ 655
Professional fees........................................... 1,664
Fixed asset depreciation.................................... 441
System conversions.......................................... 262
Other....................................................... 509
------
Total..................................................... $3,531
======

Of the total merger-related expenses, $3,312,000 was paid in the form of
cash as of December 31, 2001. As of that date, the remaining balance of $219,000
was recorded as an accrued liability for remaining expected merger related
expenses.

On April 7, 2000, Humboldt acquired Capitol Thrift & Loan for approximately
$11.9 million in cash and a contingent obligation agreement totaling $4.6
million due January 30, 2002. Under the terms of the agreement, the repayment of
principal was contingent upon performance of the Capitol Thrift & Loan loan
portfolio. The contingent liability holders were paid $4.6 million in cash in
full satisfaction of the contingency liability on January 30, 2002. This final
payment resulted in the elimination of negative goodwill in the amount of
approximately $1.2 million and the creation of a goodwill asset in the amount of
$3.4 million.

In September 1999, Humboldt acquired all of the outstanding shares of
Silverado Merger Corporation for 54,452 shares of Humboldt restricted common
stock for $9.91 per share and warrants to purchase up to 108,900 shares of
Humboldt common stock for $11.36 per share. The 54,452 shares of common stock
were issued in December 2000. The warrants to purchase up to 108,900 shares of
common stock for $11.36 per share will become exercisable if Capitol Valley Bank
achieves certain business objectives, if Capitol Valley Bank is sold or if
Capitol Valley Bank is consolidated into another one of Humboldt's bank
subsidiaries. As of December 31, 2001, warrants to purchase 72,600 shares were
exercisable.

As part of the acquisition agreement, some shareholders and supporters of
Silverado Merger Corporation purchased $1.6 million of Bancorp restricted common
stock at $12.00 per share pursuant to a private placement in September 1999.
Silverado had no operations, and all of its obligations and liabilities were
extinguished prior to consummation of the merger. Therefore, Silverado's
financial statements at the time of the merger were immaterial.

NOTE 3 -- DISCONTINUED OPERATIONS

Bancorp Financial Services, Inc. ("BFS") was originally capitalized in 1996
with $2,000,000 contributions from both Humboldt Bancorp and Tehama Bancorp.
Upon the completion of the Tehama Bancorp merger in March 2001, Humboldt became
the sole shareholder of BFS. During the first quarter of 2001, Humboldt's Board
of Directors completed a strategic review of BFS, which principally acquired and
serviced small ticket leases on a nationwide basis. This review was initiated in
response to a number of factors, including the increased regulatory burden
associated with BFS being a wholly owned subsidiary after completion of the
Tehama Bancorp merger, future capital needs of BFS to support its growth and
reliance upon the lease-backed securities market for liquidity. As a result of
this review, Humboldt adopted a plan to discontinue the operations of BFS by
sale of the company and engaged an investment banking firm to facilitate the
sale during the first quarter of 2001. A valuation reserve of $700,000, net of
tax, was recorded during the first quarter of 2001 based on an estimate of the
value of BFS as a going concern. The operating results of BFS are included, net
of tax, in the income statement as income (loss) from discontinued operations.

A-36

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During the second quarter of 2001 Humboldt was notified by the investment
banker that the prospects for the sale of BFS as a going concern were unlikely.
In response, Humboldt adopted a plan to wind-down the operations of BFS in an
orderly manner. This plan included the immediate termination of all lease and
loan acquisition activities. In connection with the wind-down plan, Humboldt
recognized a loss on discontinued operations, net of tax, of $13.5 million
during the second quarter of 2001.

The following is a summary of the major components of the wind-down charge
(dollars in thousands):

Write-off of retained interests/servicing assets............ $11,798
Provision for lease/loan losses............................. 4,679
Lease/loan market value adjustments......................... 1,580
Professional fees........................................... 470
Other....................................................... 1,315
Tax Effect.................................................. (5,848)
-------
Total wind-down expense................................... $13,994
=======

During the third quarter BFS sold approximately $5,800,000 of lease
receivables to an unrelated third party and paid down a like amount of bank
debt. Since a valuation reserve was provided during the second quarter, there
was no gain or loss recorded on the sale. Humboldt Bancorp agreed to guarantee
certain representations and warranties with respect to the underlying leases
subject to the sale. In addition, the servicing responsibilities of BFS for
approximately 5,400 leases under certain securitization servicing agreements
were transferred to a third party effective August 31, 2001. This servicing
transfer permitted BFS to relocate to a smaller facility and significantly
reduce staff levels.

As of December 31, 2001, BFS had total assets of $7,577,000, which included
cash of $1,634,000, lease receivables of $1,085,000, lease-backed notes of
$4,143,000, deferred tax assets of $600,000 and other assets of $115,000. Total
liabilities as of December 31, 2001 were $8,992,000 and included, non-bank
secured borrowings of $5,960,000, security deposits of $1,242,000, lease and
loan payment servicing liabilities of $866,000, wind down accruals of $800,000
and other liabilities of $124,000.

In addition to the assets of BFS, certain assets of Humboldt Bancorp which
were acquired from or on behalf of BFS were included as assets related to
discontinued operations. During the fourth quarter of 2001, Humboldt Bancorp
agreed to assume certain debt of BFS, which was previously guaranteed, in
exchange for ownership of approximately $7,000,000 of automobile loans that
secured the borrowing. In addition, Humboldt Bancorp agreed to repurchase
approximately $2,000,000 of automobile loan contracts that were originated by
BFS and sold to an unaffiliated financial institution during the fourth quarter
of 2001. These loans had a valuation allowance of approximately $1,000,000.

As of December 31, 2001, Humboldt Bancorp had net automobile loans acquired
from BFS and repurchased from third parties of approximately $9,000,000.
Subsequent to December 31, 2001, Humboldt Bancorp completed the sale of the
loans and certain balances previously charged off to a third party. The
valuation reserve carried by Humboldt Bancorp against the automobile loans was
sufficient so that no material gain or loss was recorded as a result of the
sale.

As of December 31, 2001 BFS had borrowings from two unrelated non-bank
lenders totaling $5,960,000. Neither of these two borrowings is guaranteed by
Humboldt Bancorp. One of the borrowings was originally structured as a loan to
an unconsolidated, bankruptcy-remote subsidiary of BFS as a commercial paper
conduit facility for funding the acquisition of lease contracts. This facility
matured on March 31, 2001 and has not been extended. As of December 31, 2001,
the balance outstanding on this loan is $884,000, a reduction of approximately
$3,575,000 from June 30, 2001. The reduction in the balance is due to the
scheduled repayments received on the underlying lease collateral of
approximately $475,000 and the repurchase of

A-37

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $3,100,000 of underlying leases at par value that did not meet
certain eligibility requirements. The leases repurchased by BFS were resold the
same day to an unrelated third party. BFS did not incur any loss on this sale
since a market valuation reserve was established during the second quarter.

The second non-bank borrowing was obtained in February 2001 in connection
with the issuance of term leased-backed notes. The placement agent was able to
place approximately $4,600,000 million of the Class C leased-backed notes with a
non-affiliated investor; however, due to certain restrictions contained in the
indenture, the transaction had to be structured as a secured borrowing. The
result of the transaction on the balance sheet of BFS was the establishment of
an asset for the Class C leased-backed notes and a related liability for
$4,600,000. This secured borrowing agreement also contained a provision whereby
BFS was permitted, for a certain period of time, to retain the monthly principal
and interest cash flows received on the leased-backed notes. These retained cash
flows were converted to a subordinated note secured by retained interest assets
of BFS. The principal portion of the cash flows were applied to reduce the
$4,600,000 million liability and along with the interest portion were added to
the subordinated debt. As of December 31, 2001 the Class C secured borrowing
totaled $3,911,000 and the subordinated borrowing totaled $1,165,000.

Subsequent to December 31, 2001, BFS and the non-affiliated investor
executed an agreement whereby the investor took certain actions that permitted
the transfer of ownership of the Class C leased-backed notes to an unrelated
third party in satisfaction of the $3,911,000 of related debt. This agreement
also provided for the transfer of the $1,165,000 to a new subordinated loan in
favor of the third party. This new subordinated loan will bear interest at 12%
compounded annually, with repayment of principal and interest tied solely to the
receipt, if any, of cash flows from retained interest cash flows received by BFS
in the future.

During the second quarter of 2001, Humboldt guaranteed BFS borrowings from
two commercial banks in consideration for modification of the loan terms and
elimination of financial covenants. During the fourth quarter of 2001, Humboldt
assumed the debt directly related to the financing of certain automobile loans
contracts in the amount of $6,400,000 and a deficiency balance related to a loan
that was previously secured by lease contracts for $300,000. Subsequent to
December 31, 2001, Humboldt sold the automobile loan contracts securing the one
loan, and the proceeds were used to pay the loan in full. Additional information
on these borrowings is included in Note 9.

Humboldt and BFS established accruals for expected costs related to the
wind-down during the second quarter of 2001. As of December 31, 2001, the
remaining balance of the wind-down accrual was approximately $800,000. This
accrual includes severance, operating costs and certain professional fees.
Management believes the accrual for wind-down expenses is sufficient to cover
the remaining wind-down costs.

The final disposal of the remaining assets of BFS is expected to be
substantially completed by March 31, 2002. Management is in the process of
marketing the remaining lease receivables and the previously charged-off lease
receivables.

In conducting its business, BFS formed three subsidiaries that are
considered "Special Purpose Entities" or "SPEs." These subsidiaries were formed
in accordance with legal requirements and were, at formation, not subject to
consolidation on the financial statements of BFS.

A-38

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A-40

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The amortized cost and fair value of collateralized mortgage obligations
and mortgage-backed securities are presented by average life in the preceding
table. Expected maturities differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.

Proceeds from sales of investment securities available-for-sale during
1999, 2000 and 2001 were $11,491,000, $17,835,000, and $52,707,000 respectively.
Gross gains and losses on those sales were $41,000 and $267,000 in 1999 $64,000
and $181,000 in 2000 and $501,000 and $295,000 in 2001.

Investment securities with an amortized cost of approximately $2,012,000
and $2,025,000 and an approximate market value of $2,011,000 and $2,062,000 at
December 31, 2000 and 2001, respectively, were pledged to meet the requirements
of the Federal Reserve and the U. S. Department of Justice. In addition,
investment securities with an amortized cost of approximately $20,615,000 and
$19,474,000 and an approximate market value of $20,726,000 and $19,786,000 at
December 31, 2000 and 2001, respectively, were pledged to secure public
deposits. Furthermore, investment securities with an amortized cost of
approximately $51,794,000 and $50,099,000 and an approximate market value of
$52,061,000 and $50,818,000 at December 31, 2000 and 2001, respectively, were
pledged as collateral for an advances from the Federal Home Loan Bank. In
addition, investment securities with an amortized cost of approximately
$23,610,000 and $16,321,000 and an approximate market value of $23,768,000 and
$16,753,000 at December 31, 2000 and 2001, respectively, were pledged to Visa
and MasterCard to secure the full performance of all of Humboldt's payment
obligations to Visa and MasterCard in connection with Humboldt's Visa and
MasterCard membership.

NOTE 5 -- LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The components of loans and leases in the balance sheet were as follows at
December 31 (dollars in thousands):

At December 31, 2000, the recorded investment in loans for which impairment
had been recognized totaled $927,000, with a corresponding valuation allowance
of $215,000. At December 31, 2001, the recorded investment in loans for which
impairment had been recognized in accordance with Statement No. 114 totaled
$1,374,000, with a corresponding valuation allowance of $344,000. For the years
ended December 31, 1999, 2000 and 2001, the average recorded investment in
impaired loans was approximately $1,569,000, $1,103, 000 and $1,014,000,
respectively. In 1999, 2000 and 2001, Humboldt recognized $ 3,000, $44,000 and
$56,000, respectively, of interest on impaired loans (during the portion of the
year that they were impaired), all of which was recognized on the cash basis.
Nonaccrual loans totaled $1.4 million, and $2.9 million at December 31, 2000,
and 2001 respectively.

A-41

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

An analysis of the changes in the allowance for loan and lease losses is as
follows for the years ended December 31 (dollars in thousands):

NOTE 6 -- PREMISES AND EQUIPMENT

Components of premises and equipment included the following at December 31
(dollars in thousands):

NOTE 7 -- MORTGAGE SERVICING RIGHTS

During the year ended December 31, 2000 and 2001 Humboldt recorded $525,000
and $1,109,000, respectively, of servicing rights related to loans originated
and sold. Amortization of the servicing rights was $341,000 and $341,000 for the
years ended December 31, 2000 and 2001, respectively. The estimated fair value
of the servicing assets aggregated $2,001,000 and $2,200,000 at December 31,
2000 and 2001, respectively. A valuation allowance is recorded where the fair
value is below the carrying amount of the servicing assets. No valuation
allowance was needed at December 31, 2000 or 2001. The carrying amount at
December 31, 2000 and 2001 was $ 1,400,000 and $2,200,000, respectively. The
valuation of servicing assets was performed using long term prepayment rates as
published by Bloomberg. The pre-tax discount rate ranged from 9-10% for FNMA and
12-13% for SBA servicing assets.

NOTE 8 -- INTEREST-BEARING DEPOSITS

Interest-bearing deposits consisted of the following at December 31
(dollars in thousands):

A-42

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Interest expense on these deposits for the years ended December 31 is as
follows (dollars in thousands):

The maturities of time deposits at December 31, 2001 are as follows
(dollars in thousands):

Three months or less........................................ $119,127
Over three months through twelve months..................... 154,049
Over one year through three years........................... 33,604
Over three years............................................ 5,750
--------
$312,530
========

NOTE 9 -- LINES OF CREDIT AND BORROWED FUNDS

The Banks has uncommitted federal funds lines of credit agreements with
four financial institutions. The maximum borrowings available under the lines
totaled $23,500,000. Availability of the lines is subject to federal funds
balances available for loan and continued borrower eligibility. These lines are
intended to support short-term liquidity, and cannot be used for more than ten
consecutive business days or more than twelve times during a given thirty day
period. At December 31, 2000 and 2001 there were no borrowings outstanding under
the agreements.

The Banks had advances from the Federal Home Loan Bank ("FHLB") as of
December 31, 2001 totaling $35,243,000. These advances are due at various
maturity dates ranging from January 1, 2002 to February 15, 2019, and interest
rates ranging from 1.51% to 7.44%. The advances have various repayment schedules
for both principal and interest. The FHLB advances are collateralized by first
mortgage loans, mortgage-backed securities and FHLB stock. Advances from FHLB
outstanding at December 31, 2001 mature as follows (dollars in thousands):

2002...................................................... $22,500
2003...................................................... 10,000
2004...................................................... --
2005...................................................... --
2006...................................................... --
Thereafter.................................................. 2,743
-------
Total..................................................... $35,243
=======

Humboldt Bancorp has a line of credit with an unaffiliated financial
institution with a borrowing limit of $7,000,000. This line is secured with
stock of the Banks and bears interest at a variable rate of Prime plus 75 basis
points, with interest payments due monthly. Principal is due at maturity, in
October 2003. Humboldt Bancorp paid an origination fee of $52,500 in connection
with this facility; this fee is being amortized over the life of the loan. This
facility had an effective rate of 5.50% and an outstanding balance of $600,000
at December 31, 2001.

A-43

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Humboldt Bancorp has an unsecured line of credit with an unaffiliated
financial institution with a borrowing limit of $1,000,000. This line bears
interest at a variable rate of Prime plus 125 basis points, with interest
payments due monthly. Principal is due at maturity, in March 2002. There was no
balance on this line as of December 31, 2001 or 2000.

In October 2001, Humboldt terminated a $4,000,000 unsecured line of credit
with an unaffiliated financial institution. This facility had an outstanding
balance of $700,000 at December 31, 2000.

Humboldt Bancorp has an amortizing term loan from an unaffiliated financial
institution that was originally obtained by Tehama Bancorp. This loan bears a
fixed interest rate of 7.50% and had an outstanding balance of $989,000 as of
December 31, 2001. Interest and principal payments are due monthly until final
maturity in April 2003.

During June 2001, Humboldt Bancorp agreed to guarantee certain bank
borrowings of BFS in exchange for modification and extension of the loans until
December 2001. During the fourth quarter of 2001, Humboldt Bancorp agreed to
assume direct liability for two borrowings in order to obtain more flexible and
favorable terms. The first borrowing is an unsecured amortizing term loan that
matures in November 2003 and bears interest at Prime. This loan had an effective
rate of 4.75% and an outstanding balance of $250,000 at December 31, 2001. The
loan requires monthly payments of interest and principal. The second borrowing
was secured by automobile loan contracts and had an original stated maturity of
November 2004. This loan bore interest at a fixed rate of 7.00% and had a
balance outstanding at December 31, 2001 of $6,473,000. Subsequent to December
31, 2001, Humboldt sold the underlying collateral to an unrelated third party
and this loan was paid in full.

During the fourth quarter of 2001, Humboldt Bancorp reached an agreement
with an unaffiliated financial institution whereby the company agreed to lend
Humboldt Bancorp $2,123,000 to finance the repurchase of performing automobile
contracts that were previously purchased from BFS. The balance of this loan at
December 31, 2001 was $2,005,000. This loan is unsecured and bears interest at a
fixed rate of 6.625%, monthly payments of principal and interest and a final
maturity in October 2004. Subsequent to December 31, 2001, Humboldt Bancorp sold
the automobile loan contracts that were repurchased.

NOTE 10 -- TRUST PREFERRED SECURITIES

In March 2000, Humboldt formed a wholly owned Delaware statutory business
trust, HB Capital Trust I ("Capital Trust I"), which issued $5,150,0000 million
of guaranteed preferred beneficial interests in Humboldt's junior subordinated
deferrable interest debentures (the "Trust Preferred Securities"). These
debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. All
of the common securities of Capital Trust I are owned by Humboldt. The proceeds
from the issuance of the common securities and the Trust Preferred Securities
were used by Capital Trust I to purchase $5,310,000 million of junior
subordinated debentures of Humboldt, which carry a fixed interest rate of
10.875%. The debentures represent the sole asset of Capital Trust I. The
debentures and related earnings statement effects are eliminated in Humboldt's
financial statements. The Trust Preferred Securities accrue and pay
distributions semiannually at a fixed rate of 10.875% per annum of the stated
liquidation value of $1,000 per capital security. Humboldt has entered into
contractual arrangements which, taken collectively, fully and unconditionally,
guarantee payment of: (i) accrued and unpaid distributions required to be paid
on the Trust Preferred Securities; (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption by Capital Trust I, and (iii)
payments due upon a voluntary or involuntary dissolution, winding up or
liquidation of Capital Trust I. The Trust Preferred Securities are mandatorily
redeemable upon maturity of the debentures on March 8, 2030, or upon earlier
redemption as provided in the indenture. Humboldt has the right to redeem the
debentures purchased by Capital Trust I in whole or in part, on or after March
8, 2010. As specified in the indenture, if the debentures are redeemed prior to
maturity, the redemption price will be the principal amount, any accrued but
unpaid interest, plus a premium ranging from 5.438% in 2010 to 0.544% in 2019.

A-44

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In December 2001, Humboldt formed a wholly owned Connecticut statutory
business trust, Humboldt Bancorp Statutory Trust II ("Statutory Trust II"),
which issued $10,000,000 of guaranteed preferred beneficial interests in
Humboldt's junior subordinated deferrable interest debentures (the "Trust
Preferred Securities"). These debentures qualify as Tier 1 capital under Federal
Reserve Board guidelines. All of the common securities of Statutory Trust II are
owned by Humboldt. The proceeds from the issuance of the common securities and
the Trust Preferred Securities were used by Humboldt Statutory Trust to purchase
$10,300,000 million of junior subordinated debentures of Humboldt, which carry a
floating rate based on three-month LIBOR plus 360 basis points. The debentures
represent the sole asset of Statutory Trust II. The debentures and related
earnings statement effects are eliminated in Humboldt's financial statements.
The Trust Preferred Securities accrue and pay distributions at a floating rate
of three-month LIBOR plus 360 basis points per annum of the stated liquidation
value of $1,000 per capital security. Humboldt has entered into contractual
arrangements which, taken collectively, fully and unconditionally guarantee
payment of: (i) accrued and unpaid distributions required to be paid on the
Trust Preferred Securities; (ii) the redemption price with respect to any Trust
Preferred Securities called for redemption by Statutory Trust II, and (iii)
payments due upon a voluntary or involuntary dissolution, winding up or
liquidation of Statutory Trust II. The Trust Preferred Securities are
mandatorily redeemable upon maturity of the debentures in December 2031, or upon
earlier redemption as provided in the indenture. Humboldt has the right to
redeem the debentures purchased by Statutory Trust II in whole or in part, on or
after December 18, 2006. As specified in the indenture, if the debentures are
redeemed prior to maturity, the redemption price will be the principal amount,
any accrued but unpaid interest. In order to manage the interest rate risk
associated with this Trust Preferred Securities issuance, Humboldt entered into
an interest rate swap agreement with an unrelated third party that converted the
floating rate to a fixed rate of 8.42% for five years. Additional information
about this agreement is provided in Note 11.

In February 2001, Humboldt formed a wholly owned Connecticut statutory
business trust, Humboldt Bancorp Statutory Trust I ("Statutory Trust I"), which
issued $5,000,000 of guaranteed preferred beneficial interests in Humboldt's
junior subordinated deferrable interest debentures (the "Trust Preferred
Securities"). These debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. All of the common securities of Statutory Trust I are owned by
Humboldt. The proceeds from the issuance of the common securities and the Trust
Preferred Securities were used by Humboldt Statutory Trust to purchase
$5,150,000 of junior subordinated debentures of Humboldt, which carry a fixed
interest rate of 10.20%. The debentures represent the sole asset of Statutory
Trust I. The debentures and related earnings statement effects are eliminated in
Humboldt's financial statements. The Trust Preferred Securities accrue and pay
distributions semiannually at a fixed rate of 10.20% per annum of the stated
liquidation value of $1,000 per capital security. Humboldt has entered into
contractual arrangements which, taken collectively, fully and unconditionally
guarantee payment of: (i) accrued and unpaid distributions required to be paid
on the Trust Preferred Securities; (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption by Statutory Trust I, and (iii)
payments due upon a voluntary or involuntary dissolution, winding up or
liquidation of Statutory Trust I. The Trust Preferred Securities are mandatorily
redeemable upon maturity of the debentures in February 2031, or upon earlier
redemption as provided in the indenture. Humboldt has the right to redeem the
debentures purchased by Statutory Trust I in whole or in part, on or after
February 22, 2011. As specified in the indenture, if the debentures are redeemed
prior to maturity, the redemption price will be the principal amount, any
accrued but unpaid interest, plus a premium ranging from 5.10% in 2011 to 0.51 %
in 2020. After February 22, 2020, there is no premium for redemption.

NOTE 11 -- INTEREST RATE SWAP

In connection with the issuance of $10,000,000 of floating-rate Trust
Preferred Securities described in Note 10, Humboldt entered into an interest
rate swap agreement with an unrelated third party. Under the terms of the
agreement, which expires in December 2006, Humboldt will pay 8.42% on a notional
amount of

A-45

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$10,000,000 and receive LIBOR plus 360 basis points on the same amount. The
effect of this transaction was the conversion of the $10,000,0000 trust
preferred issuance from floating rate at LIBOR plus 360 basis points to a fixed
rate of 8.42% for five years, the point at which Humboldt has the option to call
the Trust Preferred Securities as described in Note 10. Humboldt has classified
the swap agreement as a cash flow hedge in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The swap agreement
had a positive fair value of $146,000 at December 31, 2001. This value was
recorded in other assets on the balance sheet and reflected as a component of
accumulated other comprehensive income.

NOTE 12 -- FEES AND OTHER INCOME

Fees and other income consisted of the following for the years ended
December 31 (dollars in thousands):

NOTE 13 -- OTHER EXPENSES

Other expenses consisted of the following for the years ended December 31
(dollars in thousands):

A-46

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14 -- INCOME TAXES

The components of income tax expense included in the statements of
operations were as follows for the years ended December 31 (dollars in
thousands):

A reconciliation of income taxes computed at the federal statutory rate of
34% and the provision for income taxes for the years ended December 31 are as
follows (dollars in thousands):

A-47

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to the components
of the net deferred tax asset recorded as an other asset as of December 31 were
as follows (dollars in thousands):

Amounts presented for the tax effects of temporary differences are based
upon estimates and assumptions and could vary from amounts ultimately reflected
on Humboldt's tax returns. Accordingly, the variances from amounts reported for
prior years are primarily the result of adjustments to conform to the tax
returns as filed. A valuation allowance has been established to reduce deferred
tax assets to the amount that is more likely than not to be realized.

Income taxes receivable were $1,555,000 and $1,038,000 at December 31, 2000
and 2001, respectively.

A-48

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15 -- EARNINGS PER SHARE

The following is a computation of basic and diluted earnings per share for
the years ended December 31, which has been retroactively adjusted for stock
dividends and splits (dollars in thousands except per share amounts):

The following options were outstanding for the years ended December 31 but
were excluded from the calculation of diluted earnings per share because the
exercise price was greater than the average market price of Humboldt common
shares:

Humboldt had outstanding at December 31, 1999, 2000 and 2001 warrants for
108,900 shares issued in connection with the acquisition of Silverado Merger
Corporation (see Note 2). The current exercise price of these warrants is
$11.36. The warrants were excluded from the calculation of diluted earnings per
share because during each of the periods shown the exercise price exceeded the
average market price of Humboldt common stock.

NOTE 16 -- BENEFIT PLANS

Retirement and Profit Sharing Plan: Humboldt has a defined
contribution/401(k) retirement plan covering substantially all of the employees.
During 2001, this plan was amended in order to combine the Humboldt Employee
Stock Bonus Plan into the 401(k) plan in order to reduce the administrative
burden of managing the plans. Contributions to the plan are made at the
discretion of the Board of Directors in an amount not to exceed the maximum
amount deductible under the profit sharing plan rules of the Internal Revenue
Service. Employees may elect to have a portion of their compensation contributed
to the plan in conformity with the requirements of Section 401(k) of the
Internal Revenue Code. Salaries and employee benefits expense includes company
contributions to the retirement plan (inclusive of amounts contributed to the
former Employee Stock Bonus Plan) of $336,000 during 1999, $443,000 during 2000
and $642,000 during 2001.

A-49

HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Postemployment Benefit Plans and Life Insurance Policies: Humboldt has
purchased single premium life insurance policies in connection with the
implementation of salary continuation and deferred compensation plans for
certain key employees. The policies provide protection against the adverse
financial effects from the death of a key employee and provide income to offset
expenses associated with the plans. The specified employees are insured under
the policies, but Humboldt is the owner and beneficiary. At December 31, 2000
and 2001, the cash surrender value of these policies totaled approximately
$12,297,000 and $13,255,000, respectively.

The plans are unfunded and provide for Humboldt to pay the employees
specified amounts for specified periods after retirement and allow the employees
to defer a portion of current compensation in exchange for the Humboldt's
commitment to pay a deferred benefit at retirement. If death occurs prior to or
during retirement, Humboldt will pay the employee's beneficiary or estate the
benefits set forth in the plans.

At December 31, 2000 and 2001, liabilities recorded for the estimated
present value of future salary continuation and deferred compensation benefits
totaled approximately $4,664,000 and $5,948,000 respectively. Deferred
compensation is vested as to the amounts deferred. Humboldt maintains a
non-qualified salary continuation plan for certain senior executive officers of
Humboldt and the Banks. Under the plan, Humboldt has agreed to pay these
executives retirement benefits for a ten to fifteen year period after their
retirement so long as they meet certain length of service vesting requirements.
The plan is informally linked to several single premium universal life insurance
policies that provide life insurance on certain senior executive officers with
Humboldt named as the owner or beneficiary of these policies. Salary
continuation expense totaled $348,000, $446,000 and $765,000 as of December 31,
1999, 2000 and 2001 respectively.

Director Fee Plan: Humboldt has adopted the Humboldt Bancorp &
Subsidiaries Director Fee Plan ("Fee Plan"), as amended and restated effective
May 1, 2001. The Fee Plan permits each director of Humboldt Bancorp or the Banks
to elect to receive his director's fees in the form of Humboldt common stock,
cash, or a combination of Humboldt common stock and cash, and to elect to defer
the receipt of any of the foregoing until the end of his term as a director. If
deferral is elected, the amount of the director's fees shall be credited to an
account on behalf of the director, however, such crediting shall constitute a
mere promise on the part of the Humboldt to pay/distribute on this account. The
account is otherwise unsecured, unfunded and subject to the general claims of
creditors of Humboldt. The Fee Plan provides for the issuance of up to 146,410
shares of Humboldt common stock. The amount of such fees deferred in 1999, 2000
and 2001 totaled $86,000, $65,000 and $120,000, respectively. At December 31,
2000 and 2001, the liability for amounts due under this plan totaled $215,000
and $335,000, respectively, or approximately 25,870, and 33,254 shares of stock,
respectively, based upon the fair market value of the stock at the time the fee
was earned.

NOTE 17 -- STOCK OPTION PLANS

Humboldt had stock options outstanding under various plans at December 31,
2001, including two plans assumed in the merger with Tehama Bancorp. The stock
option plans provide for option grants to directors (of Humboldt and the Banks)
and key employees to purchase shares of Humboldt common stock at a price based
on the fair market value on the date of grant. The 2001 Humboldt Bancorp &
Subsidiaries Equity Incentive Plan ("2001 Plan") provides for grants of options,
restricted stock and stock appreciation rights. As of December 31, 2001, a total
of 235,239 options were available for grant from the 2001 Plan and no options
were available for grant from any other plan.

Generally, the options are granted for a term of ten years. Options granted
to directors typically are vested immediately and options granted to employees
vest ratably over three years. Options granted under the Tehama Bancorp plans
did not fully vest as a result of the merger.

Humboldt applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for all
stock-based compensation plans. Accordingly, no

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

compensation cost has been recognized for any stock option grants as all stock
options are granted at fair market value. SFAS No. 123, Accounting for
Stock-Based Compensation,encourages a "fair value" based method of accounting
for stock-based compensation plans. Had compensation cost for Humboldt's stock
option plans been determined based on the fair value at the grant dates for
awards under this plan consistent with the method of SFAS No. 123, net income
and net income per share would have been adjusted to the pro forma amounts
indicated below (dollars in thousands):

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:

The following is a summary of stock options outstanding and exercised under
Humboldt's various stock option plans:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about fixed stock options
outstanding at December 31, 2001 under Humboldt's various stock option plans:

NOTE 18 -- RELATED PARTY TRANSACTIONS

The Banks have entered into lending transactions with related parties,
which are defined as directors, executive officers and related interests. The
following is a summary of the aggregate activity involving related party
borrowers at December 31, 2000 and 2001 (dollars in thousands):

NOTE 19 -- COMMITMENTS AND CONTINGENT LIABILITIES

Lease Commitments: Humboldt leases 15 sites under noncancellable operating
leases. Five of the leases are renewable for an additional five-year period,
three of the leases are renewable for two consecutive five-year periods and one
of the leases is renewable for three consecutive five-year periods. The leases
contain varying requirements for increases including adjustments based on the
Consumer Price Index with minimum increases of 2% and maximum increases of 10%.
Other leases have scheduled adjustments to the base rent.

As of December 31, 2001, future minimum lease payments under noncancelable
operating leases are as follows (dollars in thousands):

2002...................................................... $ 736
2003...................................................... 711
2004...................................................... 659
2005...................................................... 662
2006...................................................... 509
Thereafter.................................................. 505
------
Total minimum lease commitments............................. $3,782
======

Rent expense for the years ended December 31, 1999, 2000 and 2001 totaled
$604,000, $925,000, and $1,021,000, respectively. Sublease rental income was
$542,000, in 2001. Future sublease income is $50,000 annually through November
2008.

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HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Financial Instruments with Off-Balance-Sheet Risk: Humboldt's financial
statements do not reflect various commitments and contingent liabilities which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These commitments and contingent
liabilities are commitments to extend credit, credit card arrangements and
standby letters of credit. A summary of Humboldt's commitments and contingent
liabilities at December 31, is as follows (dollars in thousands):

Commitments to extend credit, credit card arrangements and standby letters
of credit all include exposure to some credit loss in the event of
nonperformance of the customer. Humboldt's credit policies and procedures for
credit commitments and financial guarantees are the same as those for extension
of credit that are recorded on the balance sheet. Because these instruments have
fixed maturity dates, and because many of them expire without being drawn upon,
they do not generally present any significant liquidity risk to Humboldt.

Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Humboldt evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by Humboldt upon extension of credit, is based on management's credit
evaluation of the customer. Collateral held varies but may include accounts
receivable, inventory, property, plant, and equipment, certificates of deposits
and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Banks
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. All
letters of credit are short-term guarantees with no guarantees extending more
than two years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending facilities to customers.
Humboldt holds assigned deposit accounts as collateral supporting those
commitments for which collateral is deemed necessary. None of these letters of
credit were utilized during 2000 or 2001. Humboldt did not incur any losses on
its commitments in 1999, 2000 or 2001.

Merchant Credit and Debit Card Sales Processing: Humboldt processes the
settlement of credit and debit card sales for merchants located throughout the
continental United States, Alaska, Hawaii and Puerto Rico. The process involves
collecting funds from the card issuing bank and crediting the merchant accounts
in exchange for a merchant discount and other processing fees. The more
significant areas of risk associated with this process includes the risk that
funds due from the card issuing bank will be uncollectible, that significant
fines may be assessed for violations of VISA or MasterCard rules or that the
merchant will be unable to absorb chargebacks, deliver products due to
insolvency or may commit fraud. To protect Humboldt from losses, merchant
deposits of $50,361,000 at December 31, 2000 and $76,100,000 at December 31,
2001 have been established by withholding a percentage of merchant processing
volume. Humboldt incurred approximately $63,000 and $151,000 in net charge-offs
related to merchant credit card processing, during 2000 and 2001, respectively.

Humboldt processed approximately $3.01 billion and $4.80 billion of credit
and debit card sales for merchants during 2000 and 2001, respectively. Humboldt
also has contractual agreements under which it processes merchant bankcard
services through independent service organizations ("ISO's"). ISO's represent
$4.18 billion of Humboldt's credit and debit card sales during 2001. Under the
terms of the ISO agreements, Humboldt is indemnified against loss by the ISO.

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HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Legal Proceedings: Various legal claims have arisen during the normal
course of business which, in the opinion of management, will not result in
material liability to Humboldt.

NOTE 20 -- REGULATORY MATTERS

The primary source of cash for Humboldt is dividends received from the
Banks. Banking regulations limit the amount of cash dividends that may be paid
without prior approval of the Banks' primary regulatory agency. Cash dividends
are limited by the California Financial Code to the lesser of retained earnings,
if any, or net income for the last three years, net of the amount of any other
capital distributions made during such periods. As of December 31, 2001,
$3,330,000 was available for cash dividend distributions from the Banks without
prior regulatory approval.

Humboldt and the Banks are subject to various regulatory capital
requirements as defined for banks and bank holding companies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on Humboldt's financial statements.

As of December 31, 2001, the most recent notification from the Federal
Deposit Insurance Corporation ("FDIC") categorized Humboldt and the Banks as
well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the capital adequacy category of Humboldt or the Banks.
The following table provides a summary of the capital amounts and ratios for
Humboldt and the Banks as of December 31, 2001 and 2000:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 21 -- CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY

Condensed balance sheets as of December 31, 2000 and 2001 and the related
condensed statements of operations and cash flows for each of the years in the
three year period ended December 31, 2001 for Humboldt Bancorp (parent company
only) are presented as follows (dollars in thousands):

CONDENSED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001

CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

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HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

NOTE 22 -- FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial

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HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underling value of the Humboldt as a whole.

The estimated fair values of the Humboldt's financial instruments are as
follows at December 31 (dollars in thousands):

The carrying amounts in the preceding table are included in the balance
sheet under the applicable captions.

The following methods and assumptions were used by Humboldt in estimating
its fair value disclosures for financial instruments:

Cash and due from banks, interest-bearing deposits in other banks and
federal funds sold: The carrying amount is a reasonable estimate of fair value.

Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying amount of accrued interest receivable approximates its
fair value.

Loans and leases held for sale: Fair values for loans and leases held for
sale are based on quoted market prices or dealer quotes. If a quoted price is
not available, fair value is estimated using quoted market prices for similar
loans or leases.

Loans and leases, net: For variable-rate loans that reprice frequently and
fixed rate loans that mature in the near future, with no significant change in
credit risk, fair values are based on carrying amounts. The fair values for
other fixed rate loans are estimated using discounted cash flow analysis, based
on interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.. Loan and lease fair value estimates
include judgments regarding future expected loss experience and risk
characteristics and are adjusted for the allowance for loan and lease losses.
The carrying amount of accrued interest receivable approximates its fair value.

Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The fair values for certificates of deposit are estimated
using a

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HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities on
such time deposits. The carrying amount of accrued interest payable approximates
fair value.

Borrowed funds and trust preferred securities: The fair value of borrowed
funds and trust preferred securities is estimated using a discounted cash flow
calculation that applies interest rates currently being offered on similar debt
instruments.

Off-balance sheet instruments: Off-balance sheet instruments consist of
commitments to extend credit, credit card arrangements, standby letters of
credit and derivative contracts. The contract or notional amounts of Humboldt's
financial instruments with off-balance-sheet risk are disclosed in Note 19.
Estimating the fair value of commitments to extend credit is not considered
practicable due to the immateriality of the amounts of fees collected, which are
used as a basis for calculating the fair value, on such instruments. The fair
value of interest rate swap contracts is based on the discounted net present
value of the swap using third party dealer quotes.

NOTE 23 -- OPERATING SEGMENTS

Reportable operating segments are generally defined as components of an
enterprise for which discrete financial information is available, whose
operating results are regularly reviewed by the organization's decision makers
and whose revenue from external customers is 10 percent or more of total
revenue. Humboldt has two reportable segments under this definition, commercial
banking and merchant bankcard services. The commercial banking segment provides
traditional banking services such as checking, savings, time certificates of
deposit, loans, and lease financings. The merchant bankcard segment processes
the settlement of credit and debit card sales for merchants and issues and
maintains credit card accounts for its customers. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. Humboldt evaluates performance based on profit or loss from
operations before income taxes. Humboldt's reportable segments are strategic
business units that provide different services that are carried out by separate
departments. Included in the commercial banking segment are all other operations
of Humboldt, excluding discontinued operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table includes segment profit, including certain revenues and
expenses, and segment assets (dollars in thousands) as of and for the year
ended:

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HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 24 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table presents the summary results for the stated eight
quarters (dollars in thousands):

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HUMBOLDT BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A-62

INDEX TO EXHIBITS

23.1 Consent of KPMG LLP
23.2 Consent of Richardson and Company
23.3 Consent of Perry-Smith LLP